Dollars and Jens
Wednesday, August 24, 2005
The long-term elastic demand for gasoline
If there's a canonical example of a consumable that has an inelastic short-run demand — meaning people tend to keep buying the same amount when the price suddenly spikes — but a much more elastic demand over the longer-run — i.e. people eventually cut their usage when a price increase is sustained — it's gasoline. People often seem to have a better intuitive grasp of the first part than the second, to a certain extent viewing gasoline consumption as inevitable. How do people respond over a longer-period of time?
- Over a long enough period of time, they move to somewhere that will require less driving, in terms of a commute or other everyday activities; perhaps they were going to move anyway, and it influences the choice of destination, or perhaps they were considering it and this is enough to make them decide to do it.
- They'll buy a new car — likewise, possibly incidental to the price of gasoline, but when they find themselves in the market anyway, it affects their interest in good milage.
- Even more quickly than that, they may be influenced to carpool, where the inconvenience of sharing a ride may have been too great before, or the inconvenience of simply finding someone with whom to share it.