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Adjusting To Oil Price Shocks
Adjusting To Oil Price Shocks
S2
S1
P2
P1
D1 (short-run)
O
Q2
Q1
S2
P2
P3
S1
C
A
DL
D2
D1
This had the effect of shifting the short-run demand curve from D1 to D2. Price fell back
from P2 to P3. This gave a long-run demand curve of DL: the curve that joins points A and C.
The fall in demand was made bigger by a world recession in the early 1980s.
equilibrium would then have moved to point F: the intersection of S3 and the original
demand.
P
S2
P2
P3
S3 S
1
C
A
P1
D2
D1
Question
Give some examples of things that could make the demand for oil more elastic. What
specific policies could the government take to make demand more elastic?