Q.37 What is price Elasticity of demand for gasoline ?

Introduction

What is price Elasticity of demand ?

DR.Alfred Marshall was the first economist to introduce clearly the concept of elasticity of demand. Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a commodity to a percentage change in it’s price. Price elasticity of demand denotes the ratio at which the demand contracts with a rise in price & extends with a fall in price. There is inverse relationship between price & quantity demanded of a good.

Ed=(-) % change in quantity demanded
% change in Price

Price elasticity’s are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

GASOLINE:-

Gasoline or petrol is a translucent, liquid mixture, derived from petroleum that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasoline’s also contain ethanol as an alternative fuel. Gasoline was not invented; it is a natural by-product of the petroleum industry, kerosene being the principal product. Gasoline is produced by distillation, the separating of the volatile, more valuable fractions of crude petroleum. However, what was invented were the numerous processes and agents needed to improve the quality of gasoline making it a better commodity.

DISCUSSION:-

In the report of Mr Ramanathan they use co integration methodology to analyse demand of gasoline as long & short run behaviour .In his report he explain national per capita gasoline consumption in tonnes as function of real per capita GDP and price of gasoline. They estimate the short run price elasticity of gasoline demand is -0.21 and a short run income elasticity of 1.18. The co integration method indicates that the adjustment of gasoline consumption towards its long run equilibrium occurs at a relatively slow rate with 28% of the adjustment occurring within the first year. The long run price elasticity of demand estimated is -0.32 and the long run income elasticity estimate is 2.68. He thus derives a very high long run income elasticity and a rather inelastic price effect. He believes that the low level of gasoline consumption in India and the gradual increasing economic growth can explain the differences between his results and those obtained elsewhere.

CONCLUSION:-

Conclusion is that over-pricing of gasoline as a policy instrument is unlikely to have an influential effect on gasoline demand in India.

Submitted to:- Mr. Gurdeepak Singh

Submitted By:- Parwinder Singh

M.B.A 1st sem

Sec:- (B)