Oil Price Elasticity

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Nondurable goods are consumption goods purchased by the household sector that generally have a useful, satisfaction-providing existence of shorter than a year. The three main subcategories of nondurable goods in the National Income and Product Accounts are "food," "clothing and shoes," and "gasoline and oil." The remaining 25 percent of nondurable goods purchased by the household sector includes "fuel oil and coal" (less than 1 percent) and a handy catch-all "other" category (which is the bulk of the remaining 25 percent).

(http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=nondurable+goods,+consumption).

Durables, as a whole have an inelastic demand, especially in the long run, while many individual brands of durable have elastic demands. This is another example that the broader the category, the fewer the close substitutes and hence the lower the elasticity. Whether durable or non-durable, many manufactured goods have close substitutes, and studies show that they tend to have price elastic demands. This is why firms try to build strong brands so that consumers of their product remain loyal. It helps them to raise price without losing substantial market share. (Lipsey and Chrystal textbook).

(The above 2 paragraphs all directly copied) Middle paragraph is relevant

The short run refers to the period of time when agents in the firm cannot make many adjustments to prices and procedures. It is not a chronological period. An example of the changes in price elasticity of oil in the short run is demonstrated in Simon taylors blog. He imagines that he has a car and house heating system which causes him to use a particular fuel and energy efficiency. ‘If the price of oil or gas rises I will be limited in my scope for changing behaviour so I may not buy much less than before, even though I’m unhappy about the higher price’. This will lead to a steeply sloped demand curve because the price elasticity in the short run is low.

But in the long run I can buy a more fuel efficient car (and cars become more efficienty partly to reflect increasing demand for fuel efficiency but also because governments set increasingly tough efficiency targets). And I can buy a house with a different type of central heating system or get the house insulated (these are admittedly less easy to do, which is why buildings are the most intractable area of energy efficiency improvement).

My price elasticity is much higher in the long run because I can make more changes than in the short run. The demand curves is therefore less steeply sloped in the long run. The same is true of supply, which captures the behaviour of producers.

(Summarise in own words).

(http://www.simontaylorsblog.com/2015/01/18/the-oil-price-and-short-and-long-run-supply/)

References- (Image) http://cdn.oilprice.com/images/tinymce/Evan1/ada708.png

Lipsey and Chrystal textbook.