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Chapter 17: Problem 7

The total amount of oil in the earth is not increasing. Does this mean that in the market for oil, the supply curve is perfectly inelastic? Briefly explain.

Short Answer

Expert verified
No, the supply curve for the oil market is not perfectly inelastic. Despite the total amount of oil in the earth being fixed, the supply can increase or decrease based on factors such as technological advancements in extraction methods, price variations, and regulations.

Step by step solution

01

Understand the concept of Inelastic Supply

Inelastic supply is a situation in which the quantity of a good supplied does not change with changes in its price. The supply curve in such a scenario is typically depicted as a vertical line.
02

Apply Concept to Oil Market

Considering the context, the total amount of oil in the earth is not increasing, which implies that the quantity is fixed. However, the supply of oil on the market does not only depend on the quantity available but also various other factors like technology for extraction, regulations, and market price. Hence it's not necessary that the supply curve for oil is perfectly inelastic.
03

Clarify uniqueness of oil market

In the case of the oil market, even though the amount of oil is fixed, new technology can make previously uneconomic oil deposits feasible to extract, effectively increasing the supply. Regulations can also impact extraction rates. Therefore, the supply of oil can vary in response to these changes, hence it's not perfectly inelastic.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding the Supply Curve
The supply curve is a graphical representation used to illustrate the relationship between the price of a good and the amount producers are willing to supply. It's usually sloped upward because as prices rise, producers are generally willing to supply more.
  • When supply is elastic, the quantity changes significantly with a change in price.
  • In contrast, inelastic supply means quantity supplied doesn't change much when the price changes. This results in a vertical or nearly vertical supply curve.
However, in the real world, very few goods have a perfectly inelastic supply. Factors like production capacity, technology advancements, and existing stockpiles can affect how much can be supplied, thus altering the supply curve's slope.
Dynamics of the Oil Market
The oil market is a unique and dynamic system affected by various factors. While it's true that the physical amount of oil available on Earth is finite, several other elements come into play in determining how much oil is supplied to the market.
  • Market price fluctuations can lead to shifts in production levels.
  • Technological advancements in extraction methods can make previously inaccessible reserves viable, effectively increasing supply.
  • Political and environmental regulations can impact how, when, and where oil is extracted.
These variables mean that the oil market does not have a perfectly inelastic supply curve, even if the total amount of oil stays the same.
Influence of Economic Extraction
Economic extraction refers to the process of retrieving resources from the Earth in a way that is cost-effective and profitable. Several factors influence the economic extraction of oil, including technology, costs, and market conditions.
  • Innovations in technology can significantly reduce extraction costs, making it viable to extract oil from hard-to-reach reserves.
  • The cost of extraction is a crucial determinant - if prices are high, then extraction from less efficient or harder to reach sources can be profitable.
  • Market demand plays a role, too. Higher demand can drive up oil prices, encouraging more investment in extraction technologies.
Thus, economic extraction affects the supply curve of oil, ensuring it is not entirely inelastic since it affects how much oil can be supplied to meet market demands.

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Most popular questions from this chapter

Joe Morgan is a sportscaster and former baseball player. After he stated that he thought the salaries of Major League Baseball players were justified, a baseball fan wrote the following to Rob Neyer, a sports columnist: Mr. Neyer, What are your feelings about Joe Morgan's comment that players are justified in being paid what they're being paid? How is it ok for A-Rod [Alex Rodriguez, at the time a player on the New York Yankees] to earn \(\$ 115,000\) per GAME while my boss works 80 hour weeks and earns \(\$ 30,000\) per year?

A study found that the number of jobs in which firms used bonuses, commissions, or piece rates to tie workers' pay to their performance increased from an estimated 30 percent of all jobs in the 1970 s to 40 percent in the \(1990 \mathrm{~s}\). Why would systems that tie workers' pay to how much they produce have become increasingly popular with firms? The same study found that these pay systems were more common in higher-paid jobs than in lower-paid jobs. Briefly explain this result.

What is personnel economics?

Following the 2016 Major League Baseball season, the market for home run hitters who were free agents and available to sign with any team was unexpectedly quiet. Players such as Edwin Encarnacion and Chris Carter signed for lower salaries and for fewer years than either they or their agents had expected. Here are two explanations for the relatively low salary offers: 1\. Mark Shapiro, president and CEO of the Toronto Blue Jays, explained, "There has been a shift ... in how people value \(\ldots\) defense and some of the other aspects of players' games." 2\. Brian Cashman, general manager of the New York Yankees, blamed the weak market on a greater-thannormal number of power hitters who were free agents: "The chessboard was set up with more participants than there were chairs." Draw two graphs depicting the demand and supply for home run hitters. In the first graph, illustrate a change in the market that is consistent with Mark Shapiro's explanation for the decline in salaries. In the second graph, illustrate a change in the market that is consistent with Brian Cashman's explanation for the decline in salaries. Briefly explain your graphs.

In most universities, economics professors receive higher salaries than English professors. Suppose that the government requires that from now on, all universities must pay economics professors the same salaries as English professors. Use demand and supply graphs to analyze the effect of this requirement.
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