The average retail price of normal motor gasoline in the United States has dropped 28% from its 2014 high of $3.70 per gallon on June 23 to $2.68 per gallon on December 8. However, this price drop may have little impact on car travel and, as a result, gasoline usage. Gasoline is a generally inelastic product, which means that price fluctuations have little impact on demand.
Price elasticity is a metric that assesses how sensitive demand is to price changes.
Almost all price elasticities are negative, meaning that an increase in price causes a decrease in demand, and vice versa.
Air travel is highly elastic, especially for vacations: a 10% rise in the price of air travel results in an even higher (more than 10%) decrease in the amount of air travel.
Price adjustments that endure over time, rather than being one-time shocks, have a higher impact.
In the United States, automobile travel is far less elastic, and its price elasticity has decreased in recent decades. In the short term, the price elasticity of motor fuel is predicted to be in the range of -0.02 to -0.04, implying that a 25% to 50% decrease in the price of gasoline is required to increase automobile travel by 1%. The price elasticity for gasoline was higher in the mid-1990s, about -0.08, implying that a 12% decrease in the price of fuel was enough to increase automotive travel by 1%.
The EIA’s Short-Term Energy Outlook (STEO) estimates and forecasts motor gasoline consumption using a price elasticity of -0.02, as well as predicted changes in travel demand and fuel economy.
According to the December STEO, gasoline prices will be 23 percent lower in 2015 than in 2014, and consumption in December will be almost constant from a year ago, as increased fuel economy balances out increases in vehicle miles travelled due to reduced costs and other factors.
Price elasticities are difficult to evaluate since demand can shift for a variety of reasons other than price changes, such as changes in other economic factors (such as income), demographics, driver behaviour, vehicle fuel efficiency, and other structural factors.
The following are some plausible explanations for the recent fall in gasoline price elasticity:
- The decrease in per-capita vehicle miles driven (VMT). VMT per capita increased for decades before slowing in the late 1990s and even declining in recent years.
- The baby boomer generation’s retirement, because seniors drive less than the working-age population.
- Because urban residents drive less than those in rural and suburban areas, population migrations to cities are more common.
- Teenage licencing rates are declining as more young people delay or refuse to obtain their driver’s permits and licences.
- The proportion of household income devoted to vehicle gasoline expenses has decreased. Because fuel accounts for a lower portion of household spending, drivers may be less sensitive to price variations.
Why is gasoline a demand that is elastic?
Gasoline demand becomes more elastic over time if consumers, for example, swap in their cars for more fuel-efficient models or relocate closer to work in reaction to rising gasoline prices.
Is the price of gasoline elastic or inelastic over time?
Using quarterly data from 1991 to 2010, this research studies the demand function for gasoline in Korea. Using a co-integration and error correction model, the long-run and short-run elasticities of demand with respect to gasoline price and national income are empirically investigated (ECM). In both the long and short runs, gasoline demand is generally elastic to price and income changes, with each elasticity being stronger in the long run than in the short run. Furthermore, the response of gasoline demand to price is greater than the response to income. This suggests that in Korea, a pricing demand-side management programme could be extremely effective. The limitation of price change, in particular, is critical to the stabilisation of gasoline demand.
Is the price of fuel elastic?
We quantitatively summarise empirical estimates of gasoline demand income elasticity provided in prior studies in this paper. The studies include a wide range of countries, with an average elasticity of 0.28 in the short run and 0.66 in the long run.
What makes fuel so inelastic?
In many everyday, real-world circumstances, consumers and producers are confronted with the issue of flexibility, whether consciously or subconsciously. Let’s take a look at some of these scenarios and the primary factors that influence demand elasticity. These are the factors:
- Alternatives are readily available.
- Long-run vs. short-run
- The amount of money spent on the product as a percentage of total income
Availability of Substitutes
At least in the United States, what is the overall demand for gasoline? is widely regarded as relatively inelastic. Automobiles and trucks are popular among Americans, and the country is vast and crisscrossed by freeways. There are few alternatives to gasoline in the United States. In fact, the only viable alternatives are public transit, which is not always available, and the electric car, which is still a new technology.
However, depending on their access to an alternative, a consumer’s demand for gasoline might be elastic or inelastic. Assume that the price of fuel doubles in the following two months. You might start taking the bus or train to work instead of driving if you travel from a suburb to New York Metropolis or another city with adequate public transit. This would drastically lower your demand for petroleum. Your gasoline demand is fairly flexible.
If you travel from your house in one area to an office campus in another suburb, however, your transit options may be limited. Because you require fuel, your demand for it is relatively inelastic.
The demand for a product is generally inelastic if there are few substitutes for it. That is, the price can fluctuate, but the quantity requested remains relatively constant.
Short-Run Versus Long-Run
The difference between long-run and short-run demand for many goods and services can be significant, which impacts elasticity.
In the case of gasoline, a driver’s demand for gas may be inelastic in the short term but elastic in the long run. She may look for work or establish a business closer to home, or she could start her own business from home. When her automobile breaks down, she may opt for a more fuel-efficient vehicle or, in a case of substitution, an electric vehicle.
Long-run demand is significantly more elastic than short-run demand for most products and services. Gasoline will be unavailable in the long term because it is a fossil fuel with a finite supply. People can change their demand for a good in the long run by making any of a number of alterations.
Inelasticity, on the other hand, tends to win out in the short term compared to the long run.
What is the degree of inelasticity in gasoline demand?
Espey looked over 101 different research and discovered that the average price-elasticity of demand for gasoline in the short run (defined as 1 year or less) is -0.26. In other words, a 10% increase in the price of gasoline reduces demand by 2.6 percent.
Is gasoline a good or a bad product?
When combined with the automotive culture of the United States, where the majority of people utilise a car as their primary mode of transportation, gasoline falls under the category of “necessity products.” Meaning that the good is required for many daily functions, and limiting use, even when the commodity becomes scarce, is difficult.
Is the price of crude oil elastic or inelastic?
- Given how dependent the world economy is on oil, it has a low elasticity of demand, which means that demand for it does not fluctuate greatly when the price changes.
- Given how difficult and expensive it is to build up oil production, the supply of oil is also fairly inelastic.
- Oil price movements are notoriously large, and they frequently have an impact on the rest of the world’s economy.
Is gas considered a public good?
In one or all of these ways, public commodities like fire protection differ from private goods like gasoline. For example, while a community might technically provide fire protection only to individuals who paid a price for it, ethical and political considerations make this improbable.
What products have a demand that is inelastic?
Inelastic Products Examples Utilities, prescription medications, and tobacco products are the most prevalent things with inelastic demand. Generally speaking, essentials and medical treatments are inelastic, whereas luxury products are the most elastic. Salt is another common example.