Question

Describe in detail how your own actions reflect the ideas shared in the discussion, and relate that to the concept of elasticity.

How responsive do you think consumers will be to the price change when these fluctuations occur due to changes in supply? Why? Use the various determinants of elasticity to explain your answer.

The last time I remember a supply issue for gasoline was in high school. I vividly remember a current event question from my Social Sciences class being "With the higher gas prices, what is something a lot of gas stations are running out of?" Initially the thought from the class was gas, but the answer revealed to us was the number '4,' for the signs that are manually changed. But even with the higher prices, gas wasn't the product gas stations were running out of, because the demand stayed constant. Consumers changed their driving habits or cars, but gas was always demanded.

Gasoline is a commodity that can rarely be forgone. Gasoline is probably defined as a normal good, but it is not "as normal" as luxury items. People will carpool to save money on gas, but gas is ultimately always used, because demand for gas is fairly inelastic.

How does the price elasticity of demand for gasoline impact the effectiveness of taxes on gasoline aimed at correcting a negative externality?

Because gasoline is a product that had inelastic demand, taxes imposed on gasoline would be steadily paid by anyone traveling through the taxed area. If taxed too high, and raising the price too high for consumers, such as anything near $4.00, the quantity of gas demanded will decrease and therefore the tax imposed will be inefficient.

Answer 1

Elasticity is a responsiveness to change in particular input. If it is price then price elasticity of demand (Ped) means the degree of responsiveness of demand to a change in price which is given by formula:

Ped= %change in quantity demanded/ % change in price

Generally with increase in price, demand goes down. Example- If chocolates become expensive then demanded less.

In this case, good discussed is gasoline. Generally it has inelastic demand as fuel is necessary to run vehicles. With increasing consumerism demand for automobiles is going up and also for gasoline as it comes as complement.

Public transport also needs fuel, however not can act as substitute for demand for gasoline. In areas where cheaper and better public transport is available then demand for gasoline will certainly be elastic but still there will be some demand for gasoline.

In certain areas where terrain is uneven and less availability of efficient public transport, demand fort gasoline will be inelastic as people will have to use high power, less mileage cars.

Gasoline has income elasticity which is more than one. As it is a luxury item. As income increases, people raise demand and hence its value is positive and greater the one.

When government imposes tax to reduce consumption then sellers can easily pass it to consumers as it has inelastic demand. Car possession is now also a matter of pride and unless efficient public transport is available has inelastic demand.

It is true that too high a tax will reduce collection. it is very well explained by Laffer curve and has an optimal rate.