In the mythical nation of Oz, gasoline used to sell for $1 a gallon, and the natives purchased 100,000 gallons a week. Four years ago, the price rose to $3 a gallon, and the natives reduced their quantity demanded to 90,000 gallons a week. Calculate the

Question

price elasticity for this change. Today, gas again sells for $1 a gallon in Oz, but the natives are only buying 70,000 gallons a week. What gives?

Answer 1

Four years ago, the initial price increase to $3 demonstrated that the short-run demand for gasoline was highly inelastic (your calculation should demonstrate this). Over time, we would expect the demand to become more elastic. As consumers purchased more fuel-efficient cars and found alternatives for using gas, they could reduce their consumption of gasoline. Their current quantity demanded reflects these factors. The inelastic short-run demand shifted left, perhaps reflecting technological improvements in mileage, spurred by the previous $3 price.