The demand in Japan for gasoline is inelastic and therefore not very sensitive t

Question

The demand in Japan for gasoline is inelastic and therefore not very sensitive to market prices. Given that, describe the effect of each of the following on the quantity demanded or the demand for gasoline in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for gasoline. Explain your answers.

a. A sharp increase in the average price of gasoline in Japan.
b. A sharp rise in the price of automobiles in Japan.
c. A fall in the price of public transportation in Japan.
d. A fall in the price of electic powered cars in Japan.

Explanation / Answer

Solution :

The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price .

a) For a sharp increase in the average price of gasoline in Japan , the percentage change in quantity demanded will be less than the percentage change in price . This is because the price elasticity of demand for gasoline prices in Japan is inelastic. This is a situation of increase in the own price , other things remainig the same. On the demand curve , it is shown as an upward movement along a demand curve when the average price of gasoline increases . This upward movement on the demand curve is called contraction of demand .

b) If the prices of automobiles rises sharply in Japan , then the demand for automobiles will fall back because of high prices of automobiles . This in turn will affect the demand for gasoline because with a decrease in the sales of automobiles , there will be a decrease in the demand for gasoline . This is a siutation of rise in the prices of complementary goods. Decrease in demand of gasoline means that at the same price of gasoline , the consumer purchases less units than before due to non-price determinants or for the same quantity , he is prepared to pay a lower price than before . This is represented as demand curve shifts backwards to the left (leftward shift) . This new demand curve indicates that if the price of gasoline remains the same , the consumer will purchases less units of gasoline .

c) A fall in the price of public transportation in Japan will lead to a situation where more people will opt for public transport . This will lead to a decrease in the demand for automobiles and consequently a decrease in the demand for gasoline . This is a situation of fall in the prices of substitute goods. Decrease in demand of gasoline means that at the same price of gasoline , the consumer purchases less units than before due to non-price determinants or for the same quantity , he is prepared to pay a lower price than before . This is represented as demand curve shifts backwards to the left (leftward shift). This new demand curve indicates that if the price of gasoline remains the same , the consumer will purchases less units of gasoline .

d) A fall in the price of electic powered cars in Japan will lead to more people buying electric powered cars and therefore the demand for automobiles will come down which will lead to a decrease in the demand for gaosline . This is a situation of fall in the prices of substitute goods. Decrease in demand of gasoline means that at the same price of gasoline , the consumer purchases less units than before due to non-price determinants or for the same quantity , he is prepared to pay a lower price than before . This is represented as demand curve shifts backwards to the left (leftward shift) . This new demand curve indicates that if the price of gasoline remains the same , the consumer will purchases less units of gasoline .

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