Question

A gas station owner sees a report on TV which states that the number of gallons of gasoline sold in the U.S. has barely dropped, even as the price per gallon has soared in recent weeks. The price elasticity of demand for gasoline is described in the report as “highly inelastic”. The gas station owner responds to this report by jacking up the prices at his station by 50 cents per gallon. Sales and revenues at his station plummet in the first month after the price increase, and drop even further in the second month. What factors did this gas station owner fail to consider when he responded to the TV report by aggressively raising his prices?

Answer 1

Answer - The gas stations dealing in gasoline do not represent the monopoly. The demand may be inelastic for gasoline , but for stations , it will be elastic. The seller before increasing the price did not consider the fact that there are other sellers in market offering gasoline and consumers will move on to other stations if price is raised. The stations provide the substitute to consumers for gasoline filling. Hence as a result of rise in price by one seller , consumer will move to other station leading to decline in sale and revenue of this seller.