Economics, 3rd Edition

5) Oil production starts shrink-

ing rapidly. 

This is the Domes-

day scenario. Some studies have 

suggested that global oil production 

is currently on a plateau and will soon 

start shrinking by around 2 per cent 

per year. Existing wells will dry up. The 

world will increasingly rely on oil from 

places that are more expensive to 

develop, such as Canada’s tar sands. 

What happens then?

Nothing good. According to the 

IMF’s modelling, prices could increase 

by  800 per cent over two decades. 

Growth rates in Europe and the United 

As supplies of oil start to diminish, oil producers will find it harder and more 

expensive to find new supplies of oil. Traditional methods of extraction using 

these so-called ‘nodding horse’ pumping units may become a thing of the past.

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CHAPTER 4  ELASTICITY AND ITS APPLICATIONS  99

SUMMARY

 

●

The price elasticity of demand measures how much 

the quantity demanded responds to changes in the 

price. Demand tends to be more elastic if close substi-

tutes are available, if the good is a luxury rather than 

a necessity, if the market is narrowly defined or if buy-

ers have substantial time to react to a price change.

 

●

The price elasticity of demand is calculated as the 

percentage change in quantity demanded divided 

by the percentage change in price. If the elasticity 

is less than 1, so that quantity demanded moves pro-

portionately less than the price, demand is said to 

be inelastic. If the elasticity is greater than 1, so that 

quantity demanded moves proportionately more than 

the price, demand is said to be elastic.

 

●

The price elasticity of supply measures how much 

the quantity supplied responds to changes in the 

price. This elasticity often depends on the time hori-

zon under consideration. In most markets, supply is 

more elastic in the long run than in the short run.

 

●

The price elasticity of supply is calculated as the 

 percentage change in quantity supplied divided by 

the percentage change in price. If the elasticity is less 

than 1, so that quantity supplied moves proportionately 

less than the price, supply is said to be inelastic. If the 

elasticity is greater than 1, so that quantity supplied 

moves proportionately more than the price, supply is 

said to be elastic.

 

●

Total revenue, the total amount received by sellers 

for a good, equals the price of the good times the 

quantity sold. For inelastic demand curves, total rev-

enue rises as price rises. For elastic demand curves, 

total revenue falls as price rises.

 

●

The income elasticity of demand measures how 

much the quantity demanded responds to changes 

in  consumers’ income. The cross-price elasticity of 

demand measures how much the quantity deman-

ded of  one good responds to changes in the price 

of another good.