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Is Gasoline Demand Inelastic or Elastic? When goods and services cost more, we buy less of them. Except, like gasoline-or salt-when we don’t. How do we explain and measure this? A simple, powerful economic concept is that consumers want less of a good or service as its price increases. The ratio of these changes-technically the absolute value of the ratio-is called elasticity. More formally: “Elasticity of demand is the proportional change in the consumption of a good divided by the proportional change in the price of the good.”* Another concept: elasticity is the change in consumers’ buying behavior with a change in price. If their behavior (demand) doesn’t change even when the price does, the good or service is considered to be inelastic. The closer to zero this ratio, the more inelastic. An example is salt. Demand for salt changes little with change in price; its elasticity is about 0.1. If the percent demand change matches the percent price change, elasticity is 1.0. If the percent demand change is greater than the percent price change, the elasticity is greater than 1.0. What about gasoline? We intuitively know that when its price increases, we don’t stop driving to work. We pay more, although we might adjust by reducing the number of trips, inflating tires, driving the more-efficient car in our fleet, or carpooling. And indeed, in the short term, demand for gasoline is fairly inelastic; from one study an estimate of 0.2. Translating, for a 30% increase in gasoline price, demand is estimated to drop 6% in the near term. There is a key nuance to keep in mind: short-term vs. long-term elasticity. In the longer term-over months and even a few years, the demand for gasoline is more elastic with price. Results are closer to 0.7 So for the same 30% increase in gasoline price, demand is estimated to drop as much as 21%. Why the difference? A) A wider range of substitutes-for gasoline, and for its transport function-and B) the opportunity to make long-term capital investments. We telecommute, we carpool, bicycle, or walk. We ride the bus or the train regularly. We combine errands. We turn off cars instead of allowing them to idle for long waits. We produce other fuels, we buy more fuel-efficient cars, hybrids or electric cars, we move closer to our jobs, more refineries are built (likely overseas), more ethanol plants are built using a diversity of fuels, we produce other fuels, and we make permanent changes in our driving habits to drive less. In all the ways people are creative and can seek out ways to minimize cost, we do so. All of these actions, these behavior changes, lessen demand. Over the longer-term, this reduction in consumption entrenches. Mass transit becomes better established. Moreover, with environmental concerns, the taste for low-mpg cars declines or, with stricter CAFÉ standards, is legislated out of fashion. The stock of cars begins turning over. Consumers replace low-efficiency cars. More cars are hybrids, use ethanol, are electric, are simply more efficient-get higher miles per gallon. So directed by the signals of high gasoline prices,
Why doesn’t this happen all over the world? We have assumed unfettered gasoline prices. In countries such as China-or as the US once was-gasoline prices are capped and subsidized by the government. So no such price signals pressure consumers to make changes. Although gasoline may be less available (think gas lines), the lack of availability seems not to be as powerful and direct a signal to consume less as is higher price. *Something similar can be found in any microeconomic textbook. This comes from Microeconomic Theory by Gould & Ferguson. 
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