Substack

Sunday, July 20, 2008

Krugman feels oil prices will fall

Paul Krugman believes that oil prices may fall in the medium term. In the short run, the price elasticity of demand for oil is very low. But slowly consumers respond to the higher prices by moving to fuel efficient cars and rearranging their commutes, causing the price elasticity to increase. It is assumed that supply will be unresponsive. Therefore, as the diagram shows, the price falls from P1 to P2.

No comments: