ECO Assignment #2 Demand Elasticities
Demand Elasticities
1. As Gasoline Prices Soar, Americans Slowly Adapt
… in March, Americans drove 11 billion fewer miles than in March 2007…
“People have recognized that prices are not going down and are adapting to
higher energy cost.” … Americans spend 3.7 percent of their disposable income
on transportation fuels. At its lowest point, that share was 1.9 percent in 1998,
and at its highest it reached 4.5 percent in 1981… “We actually have a lot of
choices, based on what car we drive, where we live, how much time we choose
to drive, and where we choose to go.” For many people, higher energy costs
mean fewer restaurant meals, deferred weekend outings with the kids, less air
travel and more time closer to home. …
International Herald Tribune, May 23, 2008
Answer the following questions:
2. (i) List and explain the elasticities of demand that are implicitly referred to in the
news clip.(ii) Explain the factors identified in the news clip that may make the demand for
gasoline inelastic. How inelastic is the demand for gasoline? If the demand for gasoline is relatively
inelastic, why does Joe’s Quick-Mart lose a lot of business when he raises his gas
prices?
