A shift of the oil supply curve raises the price from $10 to $30 per barrel and reduces the quantity demanded from 40 million to 23 million barrels a day. What can you conclude about the elasticity of demand for oil?

A shift of the oil supply curve raises the price from $10 to $30 per barrel and reduces the quantity demanded from 40 million to 23 million barrels a day. What can you conclude about the elasticity of demand for oil?

• A. The supply of oil is elastic.
• B. The supply of oil is inelastic.
• C. The demand for oil is inelastic.
• D. The demand for oil is elastic.

Answer: (C)

Elasticity of demand tells us how much quantity demanded responds to a price move. Here, oil’s price rises from $10 to $30 and quantity demanded falls from 40 to 23 million barrels a day. Using arc (midpoint) percentages to avoid base effects: the price change is (30−10)/[(30+10)/2] = 20/20 = 1, a 100% increase. The quantity change is (23−40)/[(23+40)/2] = −17/31.5 ≈ −0.54, a drop of about 53.9%. The elasticity of demand is roughly −0.54, whose absolute value is less than 1. That means demand is inelastic: quantity falls, but not by as much as price rises. Since the determination is about how demand responds, not supply, the result isn’t consistent with a highly elastic demand, and the other options don’t fit because they either talk about supply or imply a larger, more responsive change in quantity.

Elasticity of demand tells us how much quantity demanded responds to a price move. Here, oil’s price rises from $10 to $30 and quantity demanded falls from 40 to 23 million barrels a day. Using arc (midpoint) percentages to avoid base effects: the price change is (30−10)/[(30+10)/2] = 20/20 = 1, a 100% increase. The quantity change is (23−40)/[(23+40)/2] = −17/31.5 ≈ −0.54, a drop of about 53.9%. The elasticity of demand is roughly −0.54, whose absolute value is less than 1. That means demand is inelastic: quantity falls, but not by as much as price rises. Since the determination is about how demand responds, not supply, the result isn’t consistent with a highly elastic demand, and the other options don’t fit because they either talk about supply or imply a larger, more responsive change in quantity.