Explain The Price Elasticity Of Demand For A Gas Station

As a vehicle owner, it is a clear observation that gas prices can range from station to station within the same area. The gas station near the freeway exit will charge its client $4.09 per gallon of gas, while the station two miles down the street charges $3.99 per gallon for the same type of gas. Why does this ten cent difference exist? There are several economic concepts that can explain this phenomenon. Although both stations are established in the same area, they function in separate markets. In simple terms, each gas station serves different buyers in different parts of town. Due to their market, the price elasticity of supply will be elastic. Gas is considered an elastic good for the supplier because the quantity of the good supplied can easily be changed. For example, if the gas station needs to provide more gas, the next order for the good will be larger. On the contrary, the price elasticity of demand for gas is quite inelastic. This means that the buyer will purchase gas at almost any set price since it is necessary component to facilitate transportation. The different elasticity for the supplier and buyer allows each individual gas station to establish pricing based on their needs. Ultimately, if a station needs to increase prices the inelastic demand allows it do so.

In the short run, consumers hold less alternatives to deal with price fluctuations. For example, when gas prices increase, buyers do not have many fuel options to substitute gas with. To save money, many buyers simply travel less to consume fewer gas. However, in the long run consumers do contain more options to adapt with the price elasticity of demand. For instance, the population may purchase more fuel-efficient cars in response to the high gas prices. Consequently, stations must balance prices to match