Is Demand for Gasoline Elastic?

Gasoline prices don’t seem to have reached the point yet (where people will cut back on driving). WE are now over $3.00/gallon in most places, and yet the roads are as crowded as ever. How high would it have to get before people alter their behavior? Suppose it were to go to $6.00-would people at last move to small cars, drastically alter their driving? And at what point would inflation comme bacK :dubious:

I think the reason the demand has been relatively inelastic is the long payback time for a new car purchase. If I get 15 miles to the gallon, and drive 12,000 miles a year, at three dollars a gallon it costs me $2400 a year to drive. At 30 miles to the gallon it costs me $1200 a year. You’re not making many car payments with that $1200 savings.

Fuel costs have always been cyclic. They trend up, but there are enough downticks that people always believe that cost will come down again. If the cost goes high and stays high you’ll get people who in the normal course will trade in their cars, and those new purchases will be more likely to be fuel efficient. You just can’t throw away the investment you have in your vehicle to save $100 per month.

Petrol demand is pretty inelastic (I dunno, something like 0.2). However, like everything, it is more elastic the longer the timeframe. Bill Door’s post gives you a good idea why: in the short term, you can do little if you have a capital stock you invested in predicated on a lower fuel price. You can drive a little less and accelarate a little easier.

In the long term, you can change a lot more. Not just your car - you can change urban population density. Other fuels become profitable. But capital and land use change slowly. I doubt that petrol would be elastically demanded (have an own price elasticity <= 1) even over a 50 year run.

My job is 15 miles from my house. The higher gas prices are a pain for me, even though I get 30 miles per gallon. But I like my job and I like my house and I’m not planning either anytime soon. I suspect that many other Americans are in the same boat.