ASSIGNMENT 1 QUESTION 37- WHAT IS PRICE ELASTICITY OF DEMAND FOR GASOLINE?

INTRODUCTION

First we need to understand the meaning of price elasticity of demand. PRICE ELASTICITY OF DEMAND measures the rate of response of quantity demand due to price change.

ED= %CHANGE IN QUANTITY DEMANDED / %CHANGE IN PRICE.

now, price elasticity of demand(PED) of gasoline states the change in demand of gasoline by change in its price.

DISCUSSION

Oil prices are directly related to gasoline prices – for every one dollar increase in the price of a barrel of oil (42 gallons of oil), gasoline prices rise 2.5 cents per gallon at the pump. Thus, a $10 increase results in abut a 25 cent increase for a gallon of gas.

Their are lots of studies done to calculate the price elasticity of demand for gasoline. One of them is done by MOLLEY ESPEY , He examined 101 studies and found that in SHORT-RUN the PED is -0.26,that is 10% hike in price of gasoline lowers quantity demanded by 2.6% whereas in the long run PED is 0.58 , that is 10% hike in price of gasoline lowers the quantity demanded by 5.8%

This graph indicates the change in demand for gasoline when price changes.

One of the study by MARK HANLY shows that if the real price of fuel goes and stay by 10% the result would be :-

1. The volume of traffic will go down roundly by 3% in the long run.

2. The volume of fuel consumption will go down by 6% in the long run.

3. Efficiency of fuel goes up by almost 4% in the long run .

4. The total number of vehicles owned will go down by almost2.5%.

GOODWIN states that in short run the PED is -0.25 with standard deviation of 0.15 , while in the long run rise price elasticity of -0.64 has standard deviation of -0.44.

CONCLUSION

From all the discussion it is stated that the absolute change in the demand cannot be detected by the change in price of gasoline. but we can conclude that with the rise in price of gasoline , the consumption or we can say that the demand would decrease.

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SUBMITTED TO

MR.GURDEEPAK SINGH

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KHUSHBOO GOYAL

MBA - A (SEM-1)