In 2014, the price of gas was $3.25. By the end of the year, gas had fallen to $2.00. Fast forward to 2021: the price of gasoline is $2.76. Assuming gasoline prices fell to $1.25 and I average 80 gallons per month, what would be the price elasticity of the demand for gasoline?

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Price elasticity of demand is generally calculated by dividing the percent of change in quantity by the percent of change in price. However, there is a little trick to this problem, because the quantity of purchase has not actually changed. No matter what the price of gasoline, whether it rise or falls, the demand for gasoline remains the same, about eighty gallons per month. Therefore, the product is actually inelastic.

Let's look at this a bit more closely. The driver continues to purchase the same amount of gasoline whether the price rises to $3.25 or drops to $1.25. It makes no difference: the driver needs to drive and adjusts his or her budget to pay the price, whatever it is.

If we try to apply the formula provided above, we would first get a change in quantity of 0%. No matter what the change in price, zero divided by anything is still zero. There is no price elasticity.

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