ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -what makes the demand inelastic for gasoline? There are many reasons that can make demand for a good inelastic. With gasoline, there are few substitute goods–a good that, if consumed, can reduce the consumption of another good.

Detailed explanation-2: -Price Elasticity of Demand There is evidence that periods of rising real gasoline prices are associated with reduced gasoline consumption. The price elasticity of gasoline demand is a widely used measure of the responsiveness of gasoline consumption to a change in gasoline prices that is not driven by demand.

Detailed explanation-3: -Studies on Gasoline Price Elasticity That is, a 10% hike in the price of gasoline lowers quantity demanded by 2.6%. In the long-run (defined as longer than 1 year), the price elasticity of demand is-0.58. Meaning, a 10% hike in gasoline causes quantity demanded to decline by 5.8% in the long run.

Detailed explanation-4: -Oil has a low elasticity of demand, meaning that the demand for oil doesn’t change significantly when the price for it changes, given how dependent the global economy is on it. The supply of oil is also fairly inelastic given how complex and costly the process is to initially set up oil extraction.