Question

According to data from the Energy Information Administration (EIA (Links to an external site.)Links to an external site.), supply fell by approximately 8.3 percent in August 2005, while prices rose 17.5 percent between August 2005 and September 2005.

In August 2005, U.S. gasoline consumption was 11,233,068 thousand gallons and the average price was $2.51 per gallon.

Based on this information, what is the implied price elasticity of demand for gasoline?

Determine the demand and/or supply equation for gasoline. Show your work.

Answer 1

Supply fell by approx 8.3%, while price rose by 17.5%

It is a clear scenario where quantity is not very responsive to price, or we can say the percentage change in quantity supplied is smaller than that in price. So it is a case of Relatively inelastic price elasticity of demand with coefficient : -1 < E_d < 0.

With supply fell by 8.3% the supply curve shifts from S to S₁ with rise in prices from P to P₁ and the price rose by 17.5% .The total consumption of 11,233,068 thousand gallons was initially at Q where Q/P = $2.51, that indicates the average price per gallon of gasoline.