South-Western College Publishing - Economics  
Conservation? What's That?
Subject Gas consumption has not decreased even in the face of higher prices
Topic Supply and Demand; Elasticity
Key Words

gasoline, price increase, oil, demand, consumption

News Story

Even though the price of oil has increased more than 40% since last year, U.S. demand for gasoline has not shown any signs of abating. According to AAA, of the 34.1 million Americans who traveled over 50 miles from home over the Labor Day weekend, 28.7 million were expected to do so. Further, the four-week demand for gasoline for the week ended August 27, 2004 was 9.42 million barrels--about the same as for the same period last year despite steep price increases.

Ultimately, the big issue for consumers is price. While a gallon of gasoline currently costs about $1.85, gas is still far cheaper in inflation-adjusted terms than it was in 1980. According to one automotive industry analyst, most consumers will not reduce their demand to any observable extent until gasoline prices reach about $3 a gallon.

Some gasoline-price-sensitive firms and consumers are beginning to respond. Airlines and transportation companies are beginning to tack on surcharges and extra fees to cover increased fuel costs. Sales of Hum-Vees have slowed down over the last few months, but sales of recreational vehicles overall increased 14% over last year, and rental reservations for the early summer were up 34% for those vehicles, which typically get relatively poor mileage.

Some argue that the increased use of gas cards and credit cards contribute strongly to the fact that people have been relatively non-responsive in terms of the amounts of gas purchased despite steep price increases. Since credit card use delays payment, people may not recognize the price increases as quickly as they would if they were paying for gasoline with cash-thus delaying any reduction in the amount of fuel used.

(Updated November, 2004)

Questions
1.

Does the fact that consumption of gasoline has increased in the face of steep price increases imply that the law of demand has been violated? Why or why not?

2. 2. Would you characterize demand for gasoline as elastic or inelastic? Why? Do you think that this demand has become more or less elastic in the last 30 years (the last gas "crisis" began in 1973)?
3. Using a supply/demand graph, illustrate the effects of oil price increases on airline ticket prices.
Source Simon Romero. "Laissez-faire my gas guzzler, already." The New York Times, 7 September 2004, http://www.nytimes.com.

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