Wednesday, May 14, 2008

Eco-nomics: The Cross-Price Elasticity of Demand

It appears that my assumption, made in an earlier post about the stupidity of the gas tax holiday, about inelastic supply from refiners was wrong. Mea culpa. I still think it is a stupid idea, but I won't launch into a back up argument now. I was wrong and that is that (Bob, in the comments was spot-on, I tip my hat to you Bob).

The reason for the incorrect assumption is quite interesting however: demand for retail gas is falling dramatically. Refiners are facing high priced crude but can't sell all of their product at the prices they have to charge to cover costs. Wow, how things change.

We have finally hit the tipping point for gas prices: the point that is finally causing consumers to adjust their behavior and curtail consumption. Oil consumption in the US fell by 3.3% in March compared to a year before according to the New York Times.

What is particularly interesting to us economist nerds is the cross-price elasticity of demand: by how much does the demand for another good change with an increase in gas prices. Well for Tri-Met, the answer is quite a bit. But that is not all, apparently people are also jumping back on their bikes. (Hat tip: Greg Mankiw).

Update: I should have included this as well: More people are flocking to smaller cars. See also this story in the O about the Prius salesman.

1 comment:

jessibeaucoup said...

I'm glad that we've finally reached the 'tipping point' for more and more Americans. It's anecdotal but more people at my work are biking one or more days a week than were previously.