Gas prices fluctuate often and in both directions. In your initial post, respond
ID: 1108575 • Letter: G
Question
Gas prices fluctuate often and in both directions. In your initial post, respond to the following:
How responsive do you think consumers will be to the price change when these fluctuations occur due to changes in supply? Why? Use the various determinants of elasticity to explain your answer.
How does the price elasticity of demand for gasoline impact the effectiveness of taxes on gasoline aimed at correcting a negative externality?
Consider incorporating the supply-and-demand model to demonstrate the elasticity of demand for gas and to show the effects of tax on the market for gas.
Explanation / Answer
The demand for gasoline will generally not be that changable as gasoline is a imperative good and so as price of the good changes the demand for gasoline will not change that much. Thus demand will be inelastic as changes oocur due to supply changes. Gasoline has few substitutes and also occupy a relatively small section of total income and so as demand for the product will be inelastic. Gasoline is also an essential commodity and so the demand curve for gasoline will be vertical and so demand changes will be insignificant.The impact of a tax on demand will will be negligible as demand wont change that much as the tax is imposed as the good is a necessity. A tax is better imposed on supply that will have an impact on the regulation of the market quantity and price.
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