Page 87 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Although there are no hard data yet, a broad range of experts say there is evidence that
people are buying less gasoline and finding ways to avoid using their cars, contributing to
less congestion on the roads.

“We have noticed that volumes are lighter than normal,” said Frank Quon, deputy director
of Caltrans freeway operations for Los Angeles County. “We haven’t done a study. But we
aren’t experiencing as much congestion, and travel times are shorter.”
Quon said the effect was most likely related to higher gasoline prices and the tail end of
spring break in schools, which causes somewhat lighter traffic.
A relatively small change in traffic volume can have a big effect on freeway speeds. That’s
because freeway speeds tend to remain stable as volume increases until the point when
lanes become saturated. Then speeds drop sharply.
The effect was illustrated in Southern California during the 1984 Summer Olympics, when
fewer drivers were on the road.
Meanwhile, Southland public transportation agencies are reporting that ridership has
jumped in the first months of 2005 — up between 3% and 12%, depending on the system.
Anecdotally, a lot of people I talk to say they are seeing the effect every day, which has cut
their commute times dramatically. Normally jammed freeways are mysteriously wide
open.

If people are indeed cutting back on driving, avoiding discretionary trips, car pooling and
using public transportation, it should mean that gasoline sales volumes are dropping.
John Felmy, chief economist at the American Petroleum Institute, the Washington, D.C.,
trade group that represents the oil industry, says that wholesale deliveries of gasoline
across the nation are down slightly.
“Some of the preliminary information we have in the last few weeks indicates that gasoline
demand appears to be down a little bit,” Felmy said.
Gasoline prices are up 51 cents a gallon this year across the nation, averaging $2.24 per
gallon, Felmy said. That’s a 29% increase in price. California prices are higher, averaging
$2.63 a gallon last week.
Question
In this article you can find estimates of both short run and long run elasticities of gasoline
demand. Find out the latter by reading carefully and applying the tools you have learnt in
this unit .

Source: Los Angeles Times, May 4, 2005
5.5 Summary

Elasticity of demand tells the degree of responsiveness of consumer to a price change. It is
measured as:
Percentage change in quantity demanded
e d
Percentage change in price
The arc elasticity is a measure of average elasticity, that is, the elasticity at the midpoint of
the chord that connects the two points (A and B) on the demand curve defined by the initial
and new price levels.
The income elasticity of demand is a numerical measure of the degree to which quantity
demanded responds to a change in income, other determinants of demand being kept
constant.

82 LOVELY PROFESSIONAL UNIVERSITY