The price elasticity of the demand for gasoline is .02. The price elasticity of demand for...

The price elasticity of the demand for gasoline is .02. The price elasticity of demand for gasoline at Joe’s service station is 1.2. Explain what might account for the difference in elasticities.

Expert Solution

•Price elasticity of demand is defined as the percentage change in quantity demanded due to percentage change in price.

•This difference in elasticity arises because of definition of market.

Narrowly defined markets ( gasoline demand at Joe's service station) has more elastic demand than broadly defined markets ( gasoline demand as a whole).

This is because it is easier to find close substitutes for narrowly defined goods. There can be many such service stations like that of Joe's station which might be providing gasoline so in this case it is very easy to find a substitute to Joe's gas station and that is why demand is more elastic.

On the other hand , gasoline, a broad category has a fairly inelastic demand because there are no good Substitutes for gasoline.

Rahul Sunny answered 2 years ago

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