Peyton Johnson
“How does Price-Demand ‘Elasticity’ Impact Consumer Consumption?”
To begin with, price demand elasticity can be defined as, “the ratio of the percentage
change in quantity demanded of a product to the percentage change in price” (Investopedia 1). It
is important for economists to measure this because it helps them to understand how supply and
demand are impacted due to a change in price and quantity. If goods are inelastic a change in
price only affects the quantity demanded slightly. When a good is elastic, a change in price
largely affects the quantity demanded. Price elasticity affects consumers in a multitude of ways.
If a good’s price rises too high, the consumer can decide whether the said product is necessary to
purchase, or if there is a substitute good that could replace this product. This all has to do with
the elasticity of the product. Price elasticity does come into play quite frequently when gasoline
prices increase. Gas prices have fluctuated for many years, however, there has always been a
demand for it. Gasoline is a complicated product because it can be inelastic and elastic. “It is
widely understood that most consumers rely on gasoline purchases to commute to work and,
hence, find it difficult to reduce their gasoline consumption when faced with higher gasoline
prices” (Dallas fed 1). In the short run, gasoline prices can be seen as inelastic because there is a
demand for them and there are very few alternative products. This means that the price could
change drastically, and consumers would still buy the product. It can be said that “The price
elasticity of motor gasoline is currently estimated to be in the range of -0.02 to -0.04 in the short
term, meaning it takes a 25% to 50% decrease in the price of gasoline to raise automobile travel
1%” (EIA 2). This means that the gasoline industry could raise prices a decent amount and still
make a profit. However, eventually, gasoline prices become more elastic. This can be traced
back to many things including the introduction of substitutes and more efficient transportation.
The Federal Bank reserve of Dallas states that “Over time, gasoline demand becomes more
elastic, as consumers may trade in their cars for more fuel-efficient models or move closer to
work, for example, in response to higher gasoline prices.” It can also be assumed that the
introduction of electric cars is negatively affecting the gasoline industry. Brands- such as Tesla-
are rapidly gaining popularity partially because they do not rely on gasoline as their mainstream
source for function. This is an initial investment, however, over time, options such as these
electric vehicles can save the consumer money. Overall, the customer is negatively affected by
the increase in gasoline prices, and economically the customers face a loss. While it is frustrating
in the short run to have slightly less pocket money, increased prices begin to take a great
economic toll on the consumer. This means that consumers have less money to spend on other
items, and more recently higher gas prices have led to excess fees on services. The Washington
Post reports that “truckers are adding fuel surcharges, and lawn care companies and mobile dog
groomers are upping their service fees.” Therefore, this is not only affecting individuals but
multinational companies. This increase in the price of gasoline and taxes affects everyone,
however, the ones who are most affected are lower-class individuals. Those who earn a smaller
income must spend a substantial portion of their earnings on things such as their house payments,
food, and other expenses so an increase in gas prices could be unobtainable for them. Most
Middle class and upper-class citizens have slightly more spending money so while it is annoying
to pay the extra money, they have the financial means to. Also, regressive taxes are affecting
these individuals. To put it simply, a regressive tax is a tax on a good that decreases as income
increases. So, if you make more money, you must pay less tax and if you make less money, you
must pay a higher tax. Lower-class individuals are more negatively affected by these regressive
gasoline taxes. The paper “Is the Gasoline Tax Regressive” makes the “Claim of the regressivity
of gasoline taxes typically rely on annual surveys of consumer income and expenditures, which
show that gasoline expenditures are a larger fraction of income for very low-income households
than for middle- or high-income households.” In conclusion, gasoline prices can be considered
elastic and inelastic and it is an exceptionally large debate. I believe that it is both and that while
everyone is affected by higher prices and taxes lower-income individuals suffer the most and are
the most negatively affected.
Sources:
https://www.investopedia.com/terms/p/priceelasticity.asp
https://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-207.pdf
https://www.dallasfed.org/research/economics/2020/0616
https://www.eia.gov/todayinenergy/detail.php?id=19191
https://www.washingtonpost.com/business/2022/03/12/gas-prices-economy-inflation/
https://www.nber.org/system/files/chapters/c11271/c11271.pdf
