The price elasticity for gasoline is significant in the determination and analysis of tax rates. It is crucial to understand consumer responses to price fluctuations as this could influence macroeconomic impacts in the petroleum industry (Lin & Prince, 2013). Understanding consumer capabilities and responses to fluctuating gasoline prices help policymakers draft frameworks that could mitigate such effects.
Elasticity for Demand of Gasoline
The demand and supply curves are significant to determine the demand and supply. The change in percentage between the quantity demand and supply represented in ratio form is referred to as the price elasticity (Lin & Prince, 2013). The demand elasticity price is the correspondence between the percentage variance in the unit demand of a good and the shift in price.
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Elasticity can be classified as elastic, inelastic, or unitary. The demand can be classified as elastic if the calculated elasticity is a positive integer that is more than one. An elastic demand always indicates that there is high responsiveness to price changes. When the calculated elasticity is a negative value and less than one, then the demand is categorized as inelastic (Coglianese et al., 2015). Inelastic demand is usually characterized by low responsiveness to price variation. A unitary demand exists when the calculated demand is precisely one. The existence of unitary elasticity indicates that the demand experiences proportional responsiveness.
A monopoly will produce an output level where MC=MR to realize maximum profit.
Given;
P 1 =$2.79 P 2 =$2.24
Q 2 =12,500 Q 2 =14,250
Change in Consumer and Producer Surplus
Consumer surplus is the variance between the prices a customer is willing to pay and the actual price for a good. In cases where the consumer is willing to pay more than the prevailing market price, it means that the benefit acquired from the good is higher than the cost of purchase. Due to the inelastic demand, there will be a more significant consumer surplus. There will be less response from the consumers since they will be willing to pay a higher price to continue consuming the good. An increase in the price level of the good when the demand is inelastic leads to the change of the consumer's surplus into producer's surplus.
The Elasticity of Supply for Gasoline
Supply elasticity is crucial in determining the relationship between goods and their pricing. The supply price elasticity is signified by the correlation between the percentage differences in the supplied quantity units to the percentage shift in the price of the goods. However, the supply and demand laws stipulate that there should be a reduction in purchases when the cost of goods increases, gasoline defies such expectations. On the contrary, the rise in gasoline prices is usually characterized by the rise in the purchase (Knittel & Tanaka, 2019). Since the quantity of a good demanded will be positively affected by the increase in price, the demand is categorized as inelastic.
In the long run, the supply is usually more elastic as compared to the short run. Since gasoline exists as a necessity good, it is inelastic in nature, making it close to being perfectly elastic (Lin & Prince, 2013). Even if the price of gasoline is increased still people will purchase it as it is a necessity, and there lacks an alternative option present within a short period.
Discussion
The gasoline demand is inelastic since a shift in price does not impact the product demand. Inelastic demand is a typical characteristic of goods which are regarded as necessities or those that lack substitutes (Choi, 2018). In the case of gasoline, inelasticity in demand is caused by the shortage of substitute goods. Gasoline is classified as a necessity good, meaning it cannot be forgone.
References
Choi, H. (2018). Disproving market demand and market supply. SSRN Electronic Journal . Retrieved from https://doi.org/10.2139/ssrn.3203158
Coglianese, J., Davis, L., Kilian, L., & Stock, J. (2015). Anticipation, tax avoidance, and the price elasticity of gasoline demand. Retrieved from https://doi.org/10.3386/w20980
Knittel, C., & Tanaka, S. (2019). Driving behavior and the price of gasoline: Evidence from fueling-level microdata. Retrieved from https://doi.org/10.3386/w26488
Lin, C. C., & Prince, L. (2013). Gasoline price volatility and the elasticity of demand for gasoline. Energy Economics , 38 , 111-117. https://doi.org/10.1016/j.eneco.2013.03.001
