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Arrange the following goods from least to most elastic, explaining your ordering:...

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yaga49 | (Level 1) Valedictorian

Posted April 24, 2013 at 2:53 PM via web

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Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Shell gasoline, and Shell gasoline at a particular gas station.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 24, 2013 at 3:16 PM (Answer #1)

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The concept of price elasticity of demand has to do with how sensitive consumers are to changes in price.  In general, when prices go up, people buy less of a good or service.  But there are differences in how much less people will buy.  When they buy much less in response to a price increase, we say that the demand for the good is relatively elastic.  If they do not change their buying behavior much, we say that the demand is relatively inelastic.

One of the factors that determine how elastic demand will be is the availability of substitutes.  If the price of a good goes up you might buy a substitute good instead.  Therefore, if there are substitutes, demand will be elastic whereas demand will be inelastic if there are few substitutes.

Of the choices given in this question, the least elastic good will be gasoline.  Shell gasoline will be next and the gasoline from one particular Shell station will have the most elastic demand of all. 

The reason for this is that there are more substitutes for Shell gasoline than for gasoline in general and more substitutes still for one Shell station.  There is not much in the way of substitutes for gasoline in general.  You almost have to have it.  Shell gas has more substitutes.  If their price goes up, most people will be willing to buy some other brand.  A particular Shell station has many substitutes.  You could buy other brands or you could even buy from other Shell stations.

For these reasons, the correct order is gasoline (least elastic), Shell gasoline, gasoline from a particular Shell station (most elastic).

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