Question

1. Drawing on the influences (determinants) of price elasticity of demand, explaining whether the demand for petrol in Australia is elastic or inelastic. Illustrate the effect of price drop on the total revenue of a petrol station.

• Part 1: explain whether demand or petrol is elastic or inelastic by exploring the determinants of price elasticity of demand. Atleast 1 explain to explain determinats. Not necessary

Part 2: explain and illustrate the impact of price drop on total revenue of a petrol station.

Answer 1

Part 1)The price elasticity of demand is the responsiveness of the quantity demanded of a good to a change in its price.The determinants of price elasticity of demand are availability of substitutesie the larger number of substitute goods the greater the price elasticity of demand,proportion of income ie higher the price of a good relative to someone's income the greater the price elasticity of demand,whether the good is a luxury or a necessity, and how narrow is the definition of the market.Petrol has inelastic demand in Australia because changes in prices have very little effect on demand and there are no good substitute for petrol.Petrol is a necessity and so price changes do not affect the demand for it.

Part 2)If demand is price elastic, total revenue wil change in the direction of the quantity change. If demand is price inelastic,total revenue will move in the direction of the price change. When demand is price inelastic , a given percentage change in price will result in a smaller percentage change in quantity demanded.This means total revenue will move in the direction of the price change , a reduction in price will reduce total revenue and an increase in price will increase total revenue.In Australia petrol has inelastic demand , so reduction in price will reduce total revenue of the petrol station .