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If there is a push to use another source of energy, other than oil, will consumers go...

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sj83 | Valedictorian

Posted April 18, 2013 at 1:01 PM via web

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If there is a push to use another source of energy, other than oil, will consumers go back to oil simply because the price goes down or will these other factors come into play?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 18, 2013 at 2:18 PM (Answer #1)

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The law of demand tells us that consumers will buy more of a good when its price goes down.  This would suggest that consumers would go back to oil as its price drops.  However, there is a caveat that is part of the law of demand.  It is the phrase “ceteris paribus.”  This means that all other relevant factors must not change.  If other factors do change, consumers might not go back to oil even as its price drops.  There are two factors that might well change and might cause consumers not to go back to oil.

First, switching between oil and other energy sources is not as easy as switching between, for example, Pepsi and Coke.  Let us say that the price of natural gas goes down and I need a new furnace.  With the price of natural gas low, I buy a new furnace that uses gas rather than oil.  If the price of oil goes down, I am not likely to buy another furnace just to take advantage of that drop.  I am sort of locked in to using gas.  The same idea applies if I have bought an electric car.

Second, demand is affected by consumer tastes.  If there is a big push for alternative energy sources, it may change people’s minds about what kinds of energy are acceptable.  People might shun oil if they believe that it is creating problems such as global warming. 

Thus, there are at least two factors that could interfere with the law of demand here.   Therefore, consumers might not go back to oil if its price went down.

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