I always assumed gas was moderately inelastic, however after watching the gas prices crumble it appears that it's probably closer to being unit elastic? (if it wasn't, the price of gas should've not decreased such a large amount??) So if the demand of gas is close to unit elastic, how long before the price of gas goes up, and continues to climb as the economy keeps fading?


I've only taken an econ101 course so if I'm mistaken or just way off I would enjoy a mini lesson on anything you have to say. Thanks.

You were right the first time, it is inelastic.

Think of demand being able to move in short run and supply only being able to move in the long run.

Demand goes up in short run and with gasoline supply being inelastic price shoots up very fast. Supply finally moves to the right (expands) and equilibrium moves back to a point close to where it was before.

gas is inelastic in the short run (people still need to go to work althoguh some switch to public transportation) but it is elastic in the long run as people can choose to buy more fuel efficient cars and stuff like that. at least thats what they taught us in my intro classes, lol.

First don't ignore the changes in currency valuations that have occurred over the past year. A weakening dollar helped drive the price up, and the strengthening dollar has helped push it back down.

Secondly your are confused on the concept of elasticity a little bit. Elasticity refers to how supply, demand and price changes influence each other, it doesn't say that price changes (even wild and crazy ones) aren't possible for inelastic goods (it actually says the opposite).

A good is perfectly elastic if a change in price leads to an identical change in supply and demand of that product. Gas would be elastic if the doubling of the price of gas lead to half as much use or twice as much supply, or some combination. The higher gas prices did not lead to an equal cut in use or increase in supply (americans cut back ~2% on their driving)) so gas is INelastic.

People cut demand by driving less, carpooling, not going on vacations, etc...

It's still fairly inelastic, but a lot can be done in the short term to cut use by a substantial amount.

I think someone earlier was referring to this as "unit elastic". And this doesn't make sense to be perfectly elastic, because demand can be more elastic than this. eg cut the price of gas in half and 20x as much will be consumed.

Some people are a little confused about elasticty.

Elasticity of x with respect to y is a measure of how much x changes when y changes. It is measured as the percentage change in x divided by the percentage change in y. In equations, we can right (dx/dy)*(y/x) or, equivalently dln(x)/dln(y).

(Note technically this is a point elasticity, which measure the how responsive x is to y in the neighborhood of their current values. For large changes an arc elasticity is more appropriate.)

x is said to be unit elastic wrt to y if the elasticity equals 1, meaning a given percentage change in y causes the same percentage change in x.

x is perfectly elastic if the elasticty tends to infinity, and x is perfectly inelastic if the elasticy equals 0.

Economists care about lots of elasticities, but the two this thread is focused on is the supply and demand elasticity for gasoline.

The consensus estimate of the medium-run demand elasticity for gasoline in the US is -0.2, which means that a 1 percent increase in price decreases the quantity demanded by 0.2 percent.

There aren't many good studies about the supply elasticity, but estimates indicate that it about 0.1 in the short run.

Econo,

Is it correct then that elasticity is the slope of the demand and supply curves then?

No - adapting the formula above to a demand or supply curve, the elasticity would be (dq/dp)*(p/q). The first fraction is the slope of the curve, and the second fraction depends on the current values of price and quantity. The reason we multiply the slope by the second term is to make elasticity unit free, so we'll get the same answer if we measure quantity in gallons or barrels and price in dollars or cents.

Alright, I get it. Thanks.

So it is true that more elastic = steeper supply/demand line and more inelastic = less steep line, right?

Yeah, my mistake.

The opposite.

Think of it this way: if the demand curve is flat or close to it, a slight change in price drastically changes the amount of product consumed. If the demand curve is steep, a big change in price does almost nothing to the quantity consumed.

Right, and this is due to the somewhat confusing convention of graphing inverse demand curves (with price on the vertical axis and quantity on the horizontal). So the slope is dp/dq.

Ah, thanks guys. I've been plotting my mental demand curve backwards with P on the x-axis.