Essay Sample on Gasoline Price Elasticity of Demand

Price elasticity is a very important measure used in showing how the quantity of a goods or services changes with the change in price. It is therefore considered as a percentage change in quantity demanded as a result of the percentage change in the price of the same product. It is easy to compute price elasticity of demand for gasoline (Sheffrin, 2003). It is simply being calculated by determining percentage change in the quantity of gasoline demanded over percentage change in price. It is necessary to ignore a negative sign.

Percentage change in the demand for gasoline = -3%

The percentage change in price =33%

PED = 0.091

According to the law of demand and supply, when there is an increase in price, the demand for goods and services reduces and when there is a decrease in price, the quantity demanded increases because the consumers will be willing to buy more goods at a lower price. It is, therefore, means that consumers usually buy more goods when the price falls but buy less when price increases (Sheffrin, 2003). Usually, consumers are sensitive to changes in prices of different goods and price sensitivity affect the demand for gasoline by either increasing or reducing its demand depending on the degree of change in price. There are some goods which do not have similar consumer response when there is a price change and this include for goods such as gasoline. It is anticipated that the demand of gasoline is affected by the price and economic condition, therefore any increase in the price of gasoline should result in a decrease in the quantity of gasoline demanded. In the Chart below a different picture is illustrated where the general expenditure of gasoline tends to vary at different periods while the consumption level remains constant.

When there is an increase in the price of gasoline per gallon, the consumer surplus will remain unchanged because the consumers will still be required to consume the same quantity of gasoline. Since gasoline usually has steady consumption pattern, it will be impossible for different households to significantly alter their buying behavior in reaction to the change in the price of gasoline per gallon thus operating below the consumer surplus. Because there is no visible substitute of gasoline, its price elasticity of demand becomes relatively inelastic. This is because there is no change in the quantity of gasoline required by consumers. People of USA depend on the automobile as their main source of transport; therefore, they have to use gasoline in their daily movement making it be a necessity good. Because it is a necessity good, it is very difficult to reduce the consumption of gasoline even though the increase in price per gallon. Owing to that it is also very difficult to substitute and most people require it for their daily transport, it, therefore, has a relatively inelastic demand.

Price elasticity of supply of gasoline also does not follow the same pattern of elastic goods. This is because the quantity of gasoline supplied in the market is relatively insensitive to either the increase or decrease in the price of gasoline per gallon. This makes any increase in the price of gasoline to relatively affect the quantity supplied in the market thus making quantity supplied to increase slowly (Amuelson, 2001). Therefore it also has a relatively inelastic price elasticity of supply. Even with the increase in the supply of gasoline, the price will remain the same because the demand for the same product will remain the same even if there is a reduction in prices of gasoline per gallon. There are many reasons that make the price of gasoline inelastic. They include fewer substitute and gasoline is also has the same consumption pattern in the USA and therefore any change in price does not affect the quantity of gasoline demanded by consumers.

References

Amuelson; Nordhaus (2001). Microeconomics (17th ed.). McGrawHill.

Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 104. ISBN 0-13-063085-3.

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