A shift of the oil supply curve raises the price from $10 to $15 per barrel and reduces the quantity demanded from 40 million to 15 million barrels a day. What can you conclude about the demand for oil?

• A. The demand for oil is elastic.
• B. The supply of oil is elastic.
• C. The supply of oil is inelastic.
• D. The demand for oil is inelastic.

Answer: (A)

Elasticity of demand measures how much the quantity demanded responds to a price change. Here, the price rises from 10 to 15, a 50% increase. The quantity demanded falls from 40 million to 15 million, a drop of 25 million, which is 62.5% decline. So the elasticity of demand is (-62.5%)/(+50%) = -1.25. The absolute value is greater than 1, meaning demand is elastic.

This large fall in quantity as price rises is the hallmark of elastic demand—consumers are quite responsive to price changes. Saying the supply curve shifts has raised the price, and the sizable drop in quantity demanded reflects that responsiveness. If demand were inelastic, the quantity demanded would fall by a smaller percentage when price increases.

Other options refer to the responsiveness of supply, not demand, or to a less responsive demand. The observed bigger percentage drop in quantity demanded compared to the price increase indicates elastic demand.