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 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.
Is natural gas pliable or inflexible?
The ratio of a percentage change in quantity demanded to a percentage change in price is known as price elasticity of demand. The stronger the responsiveness to a price shift, the more elastic demand is. In supply-demand graphs, inelastic demand is depicted by a vertical line, suggesting that demand remains constant regardless of price. Given the time lag between the price signal and the ability to respond to it, elasticity also has a temporal component. Long-term demand becomes more elastic as time passes and pricing can be adjusted more easily.
About a third of the natural gas utilised in the United States is used to generate electricity. The industrial sector consumes another third, with residential and commercial consumption accounting for the majority of the remainder. Although natural gas end-use demand is highly responsive to meteorological conditions, demand elasticity is very low in the near run. The elasticity of residential natural gas demand, for example, is relatively inelastic in the short run (between -0.1 and -0.2). With a price elasticity of demand of -0.1, a 10% fall in price only results in a 1% rise in demand. Although commercial and industrial demand is slightly more elastic in the short term, it takes two to five years to respond to price changes in the long run. Liquefied natural gas export terminals must be converted, developed, or both within seven years of a large shift in demand to exports. Longer-term flexibility raises demand price elasticity.
Is gasoline a substandard 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.
What products are pliable?
- The degree to which demand changes in response to changes in another economic component, such as price or income, is referred to as elasticity of demand.
- Demand for a good or service is considered to be inelastic if it remains constant regardless of price changes.
- Luxury things, as well as certain foods and beverages, are examples of elastic goods.
- Inelastic goods, on the other hand, include tobacco and prescription medications.
- By dividing the percentage change in the amount sought by the percentage change in the other economic variable, the elasticity of demand is obtained.
What are some examples of elastic demand?
Demand elasticity is a significant variant on the concept of demand. Elastic, inelastic, and unitary demand are the three types of demand.
An elastic demand is one in which a change in price causes a considerable change in quantity required. A demand that is inelastic is one in which the change in quantity sought as a result of a price change is modest.
The formula for calculating demand elasticity is:
The demand is elastic if the formula produces an absolute value greater than one. To put it another way, quantity moves faster than price. Demand is inelastic if the value is less than one. To put it another way, quantity varies more slowly than price. The elasticity of demand is unitary if the number is equal to one. In other words, quantity and price are both changing at the same time.
Elastic Demand
Demand elasticity is depicted in Figure 1. It’s worth noting that a change in pricing leads to a significant change in the amount demanded. Consumer durables are an example of a product having an elastic demand. These are products that are rarely acquired, such as a washing machine or a car, and can be postponed if the price rises. Automotive refunds, for example, have been quite successful in increasing automobile sales by lowering the price.
Close substitutes for a product have an impact on demand elasticity. If consumers can readily substitute another product for yours, they will swiftly move to the other product if the price of yours rises or the price of the other product falls. Beef, pork, and chicken, for example, are all meat products. Poultry consumption has increased in recent years as the price of poultry has decreased, displacing beef and pork. As a result, demand for products with near replacements is usually elastic.
Example 1 illustrates how to use the formula to calculate demand elasticity. When the price is reduced from $10 to $8 per unit, the number of units sold increases from 30 to 50. 2.25 is the elasticity coefficient.
Inelastic Demand
Figure 2 depicts inelastic demand. It’s worth noting that a change in price only has a minor impact on the quantity demanded. To put it another way, the amount demanded is not very responsive to price fluctuations. Food and fuel are two examples of such necessities. If food costs rise, consumers will not cut back on their food purchases, however they may change the sorts of food they buy. Furthermore, even if gasoline costs rise, customers will not change their driving habits significantly.
Example 2 shows how to calculate inelasticity of demand using the method above. The amount of demand increases from 40 to only 50 when the price drops from $12 to $6 (50 percent) (25 percent ). .33 is the elasticity coefficient.
This isn’t to say that demand for a specific producer is inelastic. A hike in the price of gasoline at all stations, for example, may not have a substantial impact on sales. However, an increase in the price of a single station will have a major impact on its sales.
Unitary Elasticity
As illustrated in Figure 3, demand is unitarily elastic when the elasticity coefficient is equal to one. A ten percent change in quantity divided by a ten percent change in price equals one. This means that for every 1% change in price, there is a 1% change in quantity.
Is there an elastic or inelastic demand for oil?
- 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.
