Price Elasticity of Gasoline in the United States - Essay Example

Since gasoline is considered a normal good the income elasticity will be positive. The estimated price elasticity will vary according to income, demography, and geography. The demand for gasoline is closely associated with the fuel economy of vehicles. If the price of gasoline rises the profit-maximizing gasoline companies will not be able to raise the prices according to their wish as in such cases the consumers will shift to the more fuel-efficient vehicles which will ultimately lead to a fall in demand conditions for gasoline. The rebounding effect will have a role to play in this case. The organizations may witness a rise in demand in the short run but in the long run, the demand will not be persistent and in fact, the demand will fall further than expected.

The diagram shows a clearer picture. A rise in price leads to a fall in demand.