mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Sunday, May 15, 2005

How elastic are gas prices?

I wanted to write about this for a while, but am just getting around to it. A while ago, Virgina Postrel had a post about gas price elasticity. (for non-economists, here's Wiki's definition of elasticity of demand - in simple language, if something is price-elastic, a small change in price will produce a large change in quantity demanded, if it's inelastic, a large change in price will produce only a small change in demand).

Virginia's perspective is that demand is elastic for gas, because there are lots of room for changes in one's driving. I would tend to disagree. I for one have not changed any of my driving habits with higher gas prices. I already run my errands efficiently, going to stores after work or going to multiple stores that are near each other at the same time, or going to the gym straight from work. I would do these things even if gas went down to 50 cents a gallon. I don't do it to save gas - I do it to save time. I'm too busy to drive somewhere over and over again if I can do it in one trip. My guess is that for most time-strapped Americans, the same is true. Throw in commuting, which I have to do no matter how high gas prices get (sadly, I can't call out from work because gas prices are too high) and my grad classes (once again, profs expect me to be there no matter what the price of fuel) and there aren't many trips I can eliminate. I'm still going to make the drive up and back to NJ Memorial Day weekend to visit my family, because I care about them more than I do gas prices. So there aren't really too many trips I can eliminate.

As the passage Virginia quoted points out, a large chunk of gas prices is taxes, which stays the same. But I think another factor is that for many people, gas is one of the smallest parts of their car budget. Personally, my car payments and insurance (being under 25 in a city with full coverage sucks) come out to nearly $800. My gas bill (I use a credit card with a generous cashback bonus for gas purchases) usually hovers around $150. Gas would have to go way up to make a significant change in my spending.

This is not to say that gas prices haven't affected my gas purchasing - I've started going out of my to a rather ghetto gas station that has cheaper gas. But part of this is once again time rather than money - with no night classes for the next two months, I have more time to shop around. Once I'm busier, I will probably not have the luxury of shopping around.

I'm sure there are some people on the margin who do make changes - possibly large changes - based on gas prices. Someone planning on driving cross-country may reconsider. But for most people, I think there are limited short-term changes that can be made with higher gas prices. In the long term, people may make more changes - trade in their SUV for a smaller car or buy a house closer to work - but in the short term I think changes are small.


At 7:19 PM, Anonymous Anonymous said...

You're absolutely right and Virginia is absolutely wrong.

Gasoline is extremely price inelastic. The price has more than doubled in the past few years, yet we use the same amount as we did before.

At 9:40 PM, Blogger Morgan said...

There is another reason that gas is price inelastic - it represents only part of the entire expense of driving. You've noted time, but vehicle depreciation doesn't rise and fall with gas prices, either. Am I going to let my car sit until it rusts out or gas prices come down, whichever comes first?

Look at it this way. When I buy a $20,000 car (full disclosure, I have never actually spent that much on a car), I have decided that it is worth spending that plus the cost of gas to get me where I want to go, when I want to go there. Why in the world would I be sensitive to a doubling of the cost of gas from 3 cents a mile to 6 cents a mile when I decided up front that I was willing to pay $.20 per mile in maintenance and depreciation?

At 12:01 AM, Blogger Flexo said...

Yes, I completely agree that the demand for gasoline is price inelastic. There is some evidence that cars aren't selling as well as they had been (hence necessity for 0% APR and "employee-discount deals" to get people into the showroom), but people who drive keep driving and buy the same amount of gasoline, no matter what the price.


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