QA to QC. For a small rise in the price, however, demand is perfectly inelastic, as consumers may not be willing to change their consumption patterns in response to only small increases in price, especially for a necessity such as oil. After a certain period in applying a time series analysis, demand could move from point C to point E, with substantial increase in the price of oil as price moves from PC to PE. As it moves upward, the demand curve becomes less inelastic, which means that quantity demanded becomes more responsive to higher changes in price. Quantity demanded is then reduced from QC to QE, as consumers may change their pattern of consumption by driving small and more fuel-efficient cars, insulating their homes, converting their home-heating and air-conditioning fixtures, and adopting numerous substitution and conservation measures. At higher prices, demand for oil is reduced while supply is increased, resulting after a certain interval in all excess supply or an oil glut. If a glut occurs at point E, market forces will dictate a drop in the price so long as no monopolistic market power exists to reduce the supply substantially through a carefully designed policy or contrived scarcity. Nevertheless, it may be observed that a small decrease in the price of oil will not increase quantity demanded. If the price drops from PE to PG, quantity demanded will only be increased from QE to QG. If the price drop is even smaller, the demand curve may be perfectly inelastic, since consumers will not alter their consumption habits by adopting anti-conservation measures for a small reduction in oil prices. If, however, the drop in price is substantial, as from PG to PI, an increase in quantity demanded from QG to QI becomes evident, as consumers eventually resume some of their former consumption patterns. A theoretical derivation of a demand for oil from a utility surface can be based on conventional income and substitution effects using ...
