Question

Would you consider the demand for gas to be relatively elastic or inelastic? What changes do you make to your demand for gasoline when the prices start to climb up?

Answer 1

Overall demand for gasoline—at least in the United States—is generally considered relatively inelastic. Americans own cars and trucks, and the country is large and laced with highways. Americans need gasoline because there are few substitutes for it. In fact, the only real substitutes are public transportation, which is not always available, and the electric car, which is still a relatively new technology.

However, any individual consumer's demand for gasoline can be elastic or inelastic, depending on their access to a substitute. Suppose the price of gasoline were to double over the next two months. If you commute from a suburb into New York City or another city with good public transportation, you could start taking the bus or train to work and dramatically reduce your demand for gasoline. Your demand for gasoline is relatively elastic.

On the other hand, if you commute from your home in one suburb to an office campus in a distant suburb, your transportation options may be quite limited. You need gasoline, and therefore your demand for it is relatively inelastic.

If there are few substitutes for a product, the demand for it is relatively inelastic. That means that the price can change, but the quantity demanded doesn't change very much in response.

Short-Run Versus Long-Run

The long-run and a short-run demand for many goods and services can differ substantially, and that affects elasticity.

In our gasoline example, a driver whose demand for gas is inelastic in the short-run may have elastic demand in the long run. She may find a job or start a business closer to home, or start a home-based business. She might buy a more fuel efficient car, or—in an instance of substitution—buy an electric car when her vehicle needs replacement.

For most products and services, long-run demand is far more elastic than short-run demand. As a fossil fuel with a finite supply, gasoline itself will be unavailable in the long run. Over the long run, people can make any of a number of adjustments that will alter their demand for a good.

In the short run, however, inelasticity tends to prevail, relative to the long run.

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