Imagine that some event drives up the price of petrol and diesel in the India. It could be a war in middle east that disrupts the world supply of oil, a booming Chinese economy that boosts the world demand for oil, or a new tax on crude oil passed by the existing government. How would India consumers respond to the higher price ?
It is easy to answer this question in broad fashion: consumers would buy less . This is simply the law of demand we learned but you might want a precise answer. By how much would consumption of petrol and diesel ?
However you might be curious about the answer to the petrol and diesel question. Many studies have examined consumers respone to petrol and diesel prices, and they typically find the quantity demanded responds more in the long run than it does in the short run. A 10 percent increase in petrol and diesel prices reduces consumption by 2.5 percent after a year and about 6 percent after five years. About half of the long run reduction in quantity demanded arises because people drive less and half arises because they switch to more fuel efficient cars. Both responses are reflected in the demand curv and its elasticity.
Price Elasticity of Demand
Depends upon various factors like:
1. Availability of close substitutes
2. Necessity versus luxuries
3. Demand in the market
4. Time horizon
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