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Effect Of Oil Price Change - Essay Example

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Oil is an example of a normal good in the economy. Its price change forms part of one of the biggest topic when it comes to matters of international economy. The paper "Effect Of Oil Price Change" aims to forecast commodity prices such as that of oil…
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Effect Of Oil Price Change
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Download file to see previous pages The demand and supply framework of oil price changes is very complex and becomes understandable when divided into two. The two segments are; the short run and long run demand and supply. The short-run responses to oil price changes refer to the immediate changes in the event of an oil price change. Players in the market do not make immediate adjustments to their costs and procedures with effect to the oil price changes in this period. In the real world situation, consumers using cars and home equipment that use oil will respond slowly to a change in the oil prices. For example, an increase in the oil prices will make these consumers reluctant to change their consumption behavior of oil and oil-related products to cut their expenditure on oil even though they are not impressed with the prevalent high prices (Krichene, 2008). In the short run, the sensitivity of demand to the oil price change is quite low. In the long run, the demand for oil changes with relation to a change in oil prices. The consumers respond towards a rise in oil prices in the long run by initiating actions channeled at cutting their consumption of oil. These actions are such as the using of more fuel-efficient cars and equipment to cut their expenditure on oil. The price sensitivity, in the long run, is more than in the short run since oil consumers can make changes in their consumption of oil more in the long run than in the short run. This effect makes the demand curves of oil prices to be steeper in the long run than in the short run (Prasch, 2008). ...Download file to see next pagesRead More
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