Readers Question: How could you calculate the price elasticity of demand for petrol in the united states when the figure is 0.48?
To calcuate the elasticity of demand, we divide the % change in quantity by the % change in price.
For example, if the price of petrol in the US increased by 60% in the past 6 months, leading to a fall of 10% in demand for petrol. The PED = -10 / 60 = – 0.1666
For a PED of 0.48, a rise in the price of 60%, must cause a fall in demand of about 30%.
I would be surprised if the PED of petrol was as high as 0.48.
Demand for petrol has fallen in the US, but, I don’t think it has fallen by that much.
Difficulties in Calculating Price Elasticity of Demand
- Changes over time. In the short term, people tend to just buy the petrol. In long term, they buy more fuel efficient cars or buy a bike. Therefore, elasticity of demand for petrol will be more elastic (higher) over time.
- The figure of -0.48 may be true in the long term, but, not short term
- It depends on other factors. Many factors apart from price determine demand for petrol. For example, you could argue falling demand for petrol is due to economic uncertainty in America. It is hard to isolate change in demand due solely to price.