Question

Drawing on the influences (determinants) of price elasticity of demand, explaining whether the demand for petrol in Australia is elastic or inelastic. Illustrate the effect of price drop on the total revenue of a petrol station.

Part 1: explain whether demand for petrol is elastic or inelastic by exploring the determinants of price elasticity of demand.

Part 2: explain and illustrate the impact of price rise on total revenue of a petrol station. You may draw a graph.

Answer 1

Elasticity of demand of petrol will be relatively inelastic becuase consumers does not change their quantity demanded by large even if there is rise in price.

Elasticity of petrol would be less than 1 which means %change in quantity demanded < %change in price.

If there is price drop of petrol where consumers would not change their quantity demanded. It will result in fall in total revenue.

a) The major determinant of elasticity of demand of petrol less than 1 is that consumers are habitual to drive cars and it have become necessary good for consumers. Additionally, there is no perfect substitutes available to petrol on which consumers can rely to run their cars which makes demand inelastic of petrol.

b) If price of petrol rises, total revenue of petrol station will rise due to its inelastic demand.