Chapter 2 Blog Entry

Shock Treatment


This article presents the idea that the increased price of oil does not bring upon as great as an impact as it did in 1973 and in 1979. After both of these instances, when the price of oil is increased, the economy is brought into a state of recession. This article explores the idea of the increased flexibility of the economy and the idea that countries do not rely on oil as intensively as before. Also, because this situation is an experience of Déjà vu within history, humans learn from the past and adapt to these situations. This article also explores the reasons why the ability to absorb price increases of oil will prevent the chain reaction which begins with companies increasing their prices to cover productivity costs and then leading to a recession as a result.


This article makes connections with many topics in Chapter 2. We learn in chapter two about elasticity, supply and demand. Well, oil is elastic. But, as we can see, time can help an elastic product make a transition into an inelastic product. One of the reasons why humans do not rely on oil as intensively is the discovery that other sources of energy can be used as a substitute or as a complementary source of energy which works along side of oil. Also, consumers learn to be more energy efficient resulting in less oil being used. Oil is still an elastic resource; therefore, the increase in price will also not have such a great impact on the demand. Finally, because the increase in oil prices is absorbed fairly well, it will result in lesser impact. When the article mentions the unavoidable consequences such as increase production costs, a company must respond by increasing the price to cover those costs. As this happens, the demand goes down for these products because workers are unable to pay for these high priced products. This results in the company laying workers, to decrease their expenditure and leads to a further decrease in demand. As you can see, this article makes many connections to supply, demand and elasticity.

In my opinion, even though oil is still an elastic resource, as time flows on towards the future, oil will be replaced with other forms of energy with greater stability within the economy. I also believe that because humans have learnt from the past and have learnt to adapt in such situations, it has prevented the expected recession. The ability for an elastic product to become inelastic is a good thing. As we have learnt in chapter 2, inelasticity means that there will be substitutes; substitutes mean that an economy will never run into a dead end. Studying economics will prevent future recessions. Predicting the reaction to an action and its result in the past will help the future by either using the solution again or by using a different one to prevent the same consequences from occurring once more.

http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=10130655