Elasticity of crude oil

Ok, so we can't be at a school in the Gulf and not have a blog option on oil:

Oil is a dense, convenient form of energy, an essential ingredient of the modern economy. Testimony to its importance is the value spent globally on oil, around 3% of global Gross Domestic Product (GDP) on a trend basis. While there are substitutes for oil, these must be traded against their lower energy density and inconvenience. The key linkage therefore is price. By implication if oil ceases to be cheap, at least in a relative sense, its attractiveness is diminished.

Oil cycles tend to be resilient because both supply and demand are inelastic - at least in the short term. With a lead time between discovering oil and producing of just less than a decade, many of the projects we see coming to fruition today were conceived in an environment of sub-$30/bbl oil! Further, usage of oil is so prevalent in modern society that entire manufacturing and infrastructure systems are built to deliver it. The initial response to increased prices is thrift, with secular changes only possible once there is widespread belief that these high prices are sustainable and there is regulatory intervention.

Explain why the supply and demand of oil are both inelastic in the short-term.  What does this mean, practically, for consumers and/or the oil industry long-term?

Elasticity of pet food

Is your pet very important to your family?  Nestle is counting on it:

Muscovite Yana Repina gave up sushi dinners and cut down on salmon and brie so she could afford to give her cat Busya its preferred variety of Nestle SA pet food. “I’ve tried to buy cheaper brands, but she refused to eat those,” said 34-year-old Repina. Her cat devours a can of Nestle’s Purina Gourmet a day, costing Yana about 50 rubles ($1.17), three times the price of the low-cost Friskies label, which she says her pet won’t eat.  Even in Russia, where the economy contracted a record 10.9 percent in the second quarter, consumers find it harder to cut spending on pets than on themselves and their families. Nestle’s nine-month sales of petcare products rose at more than twice the rate of overall food and beverage revenue.

According to Euromonitor, the value of dog and cat food sold in North America will have risen 5.2 percent a year on average from 2004 to 2009, double the rate of packaged foods for humans such as rice and yogurt. Pet food sales will probably gain 2.5 percent on average each year through 2014, the market researcher forecasts, compared with 1.1 percent for packaged food.  Consumers’ reluctance to cut spending on their pets enabled Nestle to increase prices by more than any product.

Wow!  I think that's CRAZY!  What does this article imply about the price elasticity of pet food?  How do you know?  Economically justify your claim.  What does this article imply about the income elasticity of pet food?  How do you know?  Economically justify your claim.

PED of cooking oil

I bet you never knew there were so many cooking oils used in India:

Primarily used for human consumption, vegetable oils and fats are also used in animal feed, for medicinal purposes and for certain technical applications. These are extracted from a range of different fruits, seeds and nuts. Unlike industrial oils and fats, which are mostly produced from petroleum, vegetable oils and fats are usually non-toxic and biodegradable, without requiring any further treatment.
 
India is the second largest edible oil market in the world after China...  Groundnut oil is the major product derived from groundnut, a major oilseed crop of India. Groundnut oil is extensively used as a cooking medium, as a food constituent and lighting fuel. Groundnut oil is an excellent source of Vitamin E, mono and poly unsaturated fatty acids and it has better keeping quality than other edible oils like soybean, corn, and safflower oils.

According to the National Commodity & Derivatives Exchange Limited, the demand of groundnut oil for cooking purpose is reasonably price elastic.

Hmmm...  That's interesting.  I never knew that!  What does it mean that groundnut oil is "price elastic"?  Economically justify this claim.  What are the implications for other oil markets in India such as soya oil, mustard oil and sunflower oil ? 

Income elasticity of new housing

Peter Crabb writes here about the housing market:

The housing market is in these woes for the simple reason that supply exceeds demand. Like any market, the laws of supply and demand apply to houses. The demand side of the housing market is particularly dependent on income levels.

According to the law of demand, as the price of a good falls, the quantity demand rises. With the large drop we have seen in housing prices these past couple of years, you would think more houses would be bought and sold.  But many other determinants of demand — the total amount consumers want to buy at any price level — must be considered. Two important factors beyond the price of a good are income levels and expectations.  Both current income levels and expectations for future growth are way down.

Economists use a measure called income elasticity to predict the rise or fall in the demand for a product for any given change in income levels. The income elasticity of demand for housing tells us how much the quantity demanded for home purchases responds to changes in consumers’ income. Compared with many other goods, housing is highly income elastic.  In a 2006 study from the Joint Center for Housing Studies at Harvard University, income elasticity for housing in Western cities and suburbs was measured at 2.00.

In effort to spur residential housing demand, two U.S. senators announced this week new legislation that would extended the $8,000 federal tax credit for first-time home buyers passed earlier this year along with other economic stimulus plans. The new legislation would also raise the income limit to qualify from the current $150,000 for a married couple to $300,000.  It’s hard to think of many households earning $300,000 a year that don’t already own a home, but regardless, high unemployment and an economy in recession mean demand for homes just isn’t there. Tax incentives for first-time buyers do little to affect the income factor of demand.

The research shows that new home sales are income elastic.  What does this mean?  Economically justify why new home sales might be income elastic.  Why do you think the $8,000 subsidy "for first-time buyers [will] do little to affect the income factor of demand"?

New cheque regulations for Bahrain's banks

The Central Bank of Bahrain is requiring all banks to adhere to new standards for the cheques they issue. The specifications are outlined in this article from August 2009:

The Central Bank of Bahrain (CBB) has introduced a uniform set of cheque standards and specifications for designing and printing of cheques, which are processed through the clearing system. CBB has said that from now onwards there will be only one standard size for all cheques.  The standardization of the size of the cheque is expected to help speed up the cheque clearing process and increase efficiency of cheque clearing, storing physical cheques as well as archiving cheque images.

CBB has added that banks have to adopt the new standards and specifications for their next cheque printing order. In order to ensure smooth transition to new design cheques, CBB has given a five month period for them to make the required changes to their cheque designs. All cheques issued to customers after 1st January, 2010 must comply with these standards and specifications.

Salman Bin Isa Al-Khalifa, executive director of banking operations at CBB, said: "Introduction of a uniform set of standards and specifications for cheques is a major step towards increasing efficiency of the current cheque clearing process and modernizing the cheque clearing system."

Analyze this situation through the lens of supply and demand.  Please comment on these questions:

• What will this new regulation do in the banking market?  Why?
  
• What are the MSB and MSC in this case?  Is MSB>MSC?  Why or why not?
  

Bahrain raises minimum wage...again!

The government of Bahrain is deeply committed to a minimum wage for Bahraini citizens, as evidenced by this article from April 2009:

THE minimum wage ceiling for Bahrainis has risen from BD200 to BD250, Labour Minister Dr Majeed Al Alawi revealed at parliament yesterday.  He said several companies had already started the new minimum wage approach, with more to follow.

"There is no Bahraini earning below BD200 and I can guarantee that," he told MPs at their discussion of the Private Sector Law yesterday.  "I believe that any salary below that is unacceptable and I challenge anyone to say that Bahrainis are getting below BD200," he said.  "Around 17,000 have benefited from the minimum wage system, which we have introduced a few years ago. But more are now benefiting from the new BD250 approach we have started.  Bahrainis are in demand in the private sector at present and it is evident as employers are willing to give BD250 as a minimum wage and even BD300 in some cases."

MPs also dropped an added article that calls for the formation of a minimum wage council after the minister told them that it would make it oblige Bahrain to give equal wages to Bahrainis and expatriates.

Comment on parliament's decision from an economic viewpont.  Please address two of these questions:

• Why would the government want to increase the minimum wage for Bahrainis?
  
• Who will benefit from this increase?  Who will be harmed?
• What are market solutions the government could use to increase the wage of Bahrainis?
• What would be the implications of a similar law for expatriate workers?

Remember to use economic language, analysis, and evaluation.