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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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