Saturday, May 19, 2012

Why is Gas Demand Dropping?

Let's look at this from an economic perspective: 

     The length of time that people have to respond to price changes also plays a role. A good example is that of gasoline. Suppose you are driving across  the country when the price of gasoline suddenly  increases. Is it likely that you will sell your car and  abandon your vacation? Not really. So in the short  run, the demand for gasoline may be very inelastic.   
     In the long run, however, you can adjust your behavior to the higher price of gasoline. You can buy  a smaller and more fuel-eficient car, ride a bicycle, take the train, move closer to work, or carpool with other people. The ability to adjust consumption patterns implies that demand elasticities are generally higher in the long run than in the short run.

Samuelson, Paul A (2009-04-08). Economics (Page 66). Business And Economics. Kindle Edition.

First, consider this chart:

Look at this chart as a time series; start with the line at the far left, move to the right and than when you reach the farthest point on the right, go back and start with the red line.  Put another way, gas prices have been high for about a year -- and that's before we take the 2008 price spike into consideration,

which would lengthen the time out a bit more.  That means that consumers have had several years to adapt their behavior to the reality of high gas prices.  As professor Samuelson observes, over time demand becomes more elastic as people have the opportunity to change their behaviors.  Hence we get this:

Dropping demand.