Question

Consider the following two types of demand by a consumer at the gas station. How much is his price elasticity in each case? a) “Please fill up my empty tank no matter what the price is!” b) “Please give me $20 gas no matter what the price is!”

Answer 1

a) Here, the quantity demanded by this consumer doesn't varies with price (i.e., quantity demanded is always the size of his tank). So, his price elasticity is zero.

b) Here, the total expenditure by the customer is constant,i.e. $20. It means P * Q = $20. When price will increase Quantity demanded will decrease and when price decreases, quantity demanded will increases such that total expenditure will be $20. So, it means the percentage change in price is always offset by the same percentage change in quantity, so that the total expense remains constant.total expenditure is constant means price elasticity is equal to 1.