Part 1: Elasticity:
Read Source 1 and 2 and answer the following questions:
Source 1- Opinion Piece
Opinion Piece: Best Potential Returns from Oil
The good news, of course, is that due to the lower prices demand is up.
Commodities [like crude oil] are the ultimate definer of price elasticity of demand. When stuff is cheap, you use a lot more of it. When it is expensive, you use a lot less. Global oil demand rose 2.0% year over year to a new record high last month.
That's the best growth rate since 2011.
Source- New technology
The new oil revolutions
Beginning less than a decade ago, the shale oil revolution has turned the long run declining oil production trends in the United States into rises of 73% between 2008 and 2014. [Shale oil extraction is a method of unconventional oil production which converts rock into shale oil which is then used or purified by adding hydrogen and removing impurities]. An exceedingly high rate of productivity improvements in this relatively new industry promises to strengthen the competitiveness of shale output even further.
1. What has happened to the price of crude oil in 2015? What has happened to the demand for crude oil in 2015? Is there an economic theory that supports this relationship? Support your answer with a diagram.
2. In the last 6 months of 2015 oil prices fell by 30% and oil demand has risen by 2%. Based on this data what type of price elasticity does oil demand have?
3. Do you agree with the opinion expressed in Source 1 on the price elasticity of demand? Why or why not?
4. Would you advise an oil producer to increase oil prices or decrease oil prices based on your analysis in previous questions? Explain and justify your answer with a diagram. (Hint: Think of Topic 4 tests)
5. Based on Source 2 how would the price elasticity of supply have changed since the introduction of shale oil production in 2008? Support your answer with economic theory.
Part 2: Market Forms and Production Costs
Read Source 1 and 2 and answer the following questions:
Source 1- Supermarkets Price War
Fruit, veg prices slashed in supermarket price war
Fruit and vegetables have just become the latest battleground in the discount war between supermarket giants Coles and discounts on fresh produce.
The latest round of cuts comes on top of Coles and Woolworths scrambling to undercut each other on items such as bread and milk. But while lower prices may be good news for consumers, farmers' groups are renewing warnings that the price war risks driving growers out of business. Not all growers are happy. They say the supermarket price wars are making it tough for them to stay in business. William Churchill, spokesman for peak body Ausveg, says dropping prices at Coles places pressure on the rest of the industry.
"Ausveg's main concern is, are these discounts for Coles growers sustainable? And what's this going to do to the rest of the industry as growers and farmers who supply to independent retailers, Woolworths, or even just the markets, start to see their sales volumes through those outlets dry up as people start to shift to Coles for these prices," he said.
"We're seeing some substantial heartache happening in the milk industry, we're seeing growers producing milk for less money and they're having to work more for that," he said.
Source 2- Supporting Diagrams
1. What type of market structure is the supermarket industry? Explain why with reference to Sources 1 and 2 and economic theory.
2. Is it in the interests of Woolworths and Coles to have a price discount war? Why? What would be a better strategy for Coles and Woolworths to take in regards to pricing? (Refer to the kinked demand curve and game theory in your answer.
3. What type of market structure is the market for vegetables provided by farmers? Explain why with reference to Sources 1 and 2 and economic theory.
4. How would falling prices for their products due to the price war affect the individual vegetable producer? Demonstrate your answer with reference to a diagram showing only an individual farmer's cost curves. Would small farmers be forced to leave the market in the long-run? Why?
5. If individual farmers made significant improvements in their technologies could they overcome the price falls discussed above and stay in business in the long-run? Support your answer by referring/adding to your diagram in 4 and thinking about costs.