PRICE ELASTICITY OF DEMAND

           PRICE ELASTICITY OF DEMAND FOR NEW SECTOR

Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.

We think of many ways to cut the fuel consumption in response to high price we bear. We use several methods like carpool for official work and same for school students or when going for shopping and parties. So, the main thing is “price elasticity of demand” of new sector GAS fuel.

Price elasticity for gas is just like a imaginary situation, if gas price rise, what will happen to quantity demanded?

There are many studies who researched and determined what price elasticity of demand for gas is. One study published in ENERGY JOURNAL which explains variation in price elasticity of demand estimates of gas demand in United States.

This study tells about 101 different studies for short term (1 year or less), the average price elasticity of demand for gas fuel is -2.06. That is a 10% hike in the price of gas lower quantity demanded by 2.06%.

On the other hand in long run (longer than one year) price elasticity of demand is -5.08. Meaning 10% hike in gas fuel causes quantity demanded to decline by 5.8% in the long run.

Another analysis conducted by PHIL GOODWIN and JOYCE DRAGY and give title “Review of income and price elasticity in the demand for road traffic ”. In it they summarize their finding on the price elasticity of demand of gas. If the real price of fuel goes up, and stays up by 10% the result is , the volume of traffic will go down by roundly 1% within about a year, and in long run down fall is about 3%.

CONCLUSION

Whlie one cannot say with certainty what the direction of rise in gas fuel tax will have on quantity demandedit can be assured that a rise in gas tax , all else being equal, will cause consumption to decrease.