Question

Due to pandemic situation in international market, oil prices decreased drastically. Its effects also came into Pakistan and three times price reduce since the pandemic start. Calculate price elasticity of demand of oil in Pakistan by assuming any prices and quantities of oil in Pakistan.
·         Use graphs in the support of your argument
·         With out calculations, answer will not be complete.
·         You can use any appropriate method for calculating elasticity.
·         What you think that demand of oil prices are elastic or inelastic in Pakistan? It purely based on values which you assumed.

Answer 1

Let us assume the following price level and the resulting quanitities:

	Price	Quantity
Point A (Before pandemic)	$15	100 L
Point B (Price decline after the pandemic	$5	150L

We know that price elasticity is given as: %age change in quantity demanded ÷ %age change in price.

%age change in quantity demanded = [(150-100)÷100]×100 = 50%

%age change in price level = [(5-15)÷15]×100 = -66.67%

Thus, price elasticity = 50÷(-66.67) = 0.75

Thus, on the basis of assumed values, the price elasticity if demand is inelastic. This is because the elasticity is less than one. In other words, the change in quanitity demanded is less than the change in price level. Due to this, the demand for oil in Pakistan is inelastic on the basis of assumed prices and quantities.