In a scenario where the price of oil rises from $10 to $15 per barrel and the quantity demanded falls from 40 million to 15 million barrels a day, the demand for oil is

In a scenario where the price of oil rises from $10 to $15 per barrel and the quantity demanded falls from 40 million to 15 million barrels a day, the demand for oil is

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

Answer: (A)

Elasticity of demand shows how strongly quantity demanded responds to a price change. Here, the price rises by 50% (from 10 to 15), while quantity demanded falls by 62.5% (from 40 to 15). The drop in quantity is larger in percentage terms than the rise in price, so the elasticity magnitude is |PED| = 62.5% / 50% = 1.25, which is greater than 1. That means demand is elastic: consumers reduce their purchases a lot in response to the higher price. This also helps explain why total revenue would fall when the price increases, since the quantity drop more than offsets the higher price. The scenario focuses on demand, not supply, so the other options about supply do not fit.

Elasticity of demand shows how strongly quantity demanded responds to a price change. Here, the price rises by 50% (from 10 to 15), while quantity demanded falls by 62.5% (from 40 to 15). The drop in quantity is larger in percentage terms than the rise in price, so the elasticity magnitude is |PED| = 62.5% / 50% = 1.25, which is greater than 1. That means demand is elastic: consumers reduce their purchases a lot in response to the higher price. This also helps explain why total revenue would fall when the price increases, since the quantity drop more than offsets the higher price. The scenario focuses on demand, not supply, so the other options about supply do not fit.