Principles of Economics- Mankiw (5th) 107

Principles of Economics- Mankiw (5th) 107 - CHAPTER 5 E L A...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 111 price. Thus, as panel (a) of Figure 5-9 shows, the short-run supply and demand curves are steep. When the supply of oil shifts from S 1 to S 2 , the price increase from P 1 to P 2 is large. The situation is very different in the long run. Over long periods of time, pro- ducers of oil outside of OPEC respond to high prices by increasing oil exploration and by building new extraction capacity. Consumers respond with greater conser- vation, for instance by replacing old inefficient cars with newer efficient ones. Thus, as panel (b) of Figure 5-9 shows, the long-run supply and demand curves are more elastic. In the long run, the shift in the supply curve from S 1 to S 2 causes a much smaller increase in the price. This analysis shows why OPEC succeeded in maintaining a high price of oil only in the short run. When OPEC countries agreed to reduce their production of oil, they shifted the supply curve to the left. Even though each OPEC member sold
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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