Demand Elasticity of Gasoline

Paper Summary:

This paper explains that, with gas prices across the country reaching record levels, understanding the theory of demand elasticity of gasoline has assumed new importance for policymakers and consumers. The author stresses that gasoline has no close substitutes; gasoline, in much of the United States, is a necessity and has only a moderate affect on the budgets of the non-poor. The paper demonstrates that, even though there are an enormous number of players in the gasoline market and confounding variables, economists are still able to gauge with a fair degree of accuracy just how much driving the average American consumer will be willing to forego: The typical American consumer may be willing to give up something of minor consequence involving gasoline; but, in general, Americans love to drive and they are going to buy gasoline.

Table of Contents
Introduction
Economic Theory of Demand Elasticity
Empirical Data Relating to Demand Elasticity
Analysis of the Data
Figure: Individual and Market Demand Curves
Conclusion

From the Paper:

"Demand elasticity relates to how much consumers are willing to pay for something based on their individual needs and wants on an aggregated basis; economists measure this degree of elasticity along a price elasticity of the demand curve. According to Robert E. Kuenne (1968), "The degree of downward reaction of the amount demanded to a price rise or upward reaction to a price fall is measured by the economist at any given point on the demand curve with a concept called the price elasticity of the demand curve" (127). Therefore, the degree by which quantity changes as price changes is the percentage change in quantity to the percentage change in price (% Change in Quantity / % Change in Price).

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