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What is elasticity of demand, and why is it making us pay such high gas prices?

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yaya1313 | eNoter

Posted November 14, 2013 at 9:53 PM via web

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What is elasticity of demand, and why is it making us pay such high gas prices?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 14, 2013 at 10:07 PM (Answer #1)

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To be precise, what we are talking about here is price elasticity of demand.  There are other kinds of elasticity, but price elasticity is what you are referring to in this question.

The law of demand tells us that the quantity demanded of a product will drop when the price goes up.  However, the law of demand does not tell us how much the quantity demanded will drop when the price goes up by a certain amount.  This is price elasticity of demand.  Price elasticity of demand is a measure of how much the quantity demanded changes when the price of a product changes.

Price elasticity of demand does not make us pay higher gas prices.  Instead, it is our own decisions that make us pay higher gas prices.  Our decisions have created a situation in which the demand for gasoline is relatively price inelastic.  That is, when the price of gas rises, we do not buy very much less of it.

The reason that demand for gasoline is price inelastic is because we do not feel that there are good substitutes for gasoline.  We do not like to ride bicycles or mass transit.  We do not like to car pool.  Instead, we like to drive our own cars.  When there is no substitute for a good or service its demand is price inelastic. 

So, price elasticity of demand is a measure of how much the quantity demanded for a product changes when its price changes.  Price elasticity of demand “makes us” buy more gas because we do not have good substitutes for gas and therefore the demand for gas is price inelastic.

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