Summary
In economics, price inelasticity of demand refers to the fact that a price change has little or no effect on the quantity demanded of a good or service. Consumers do not respond much to changes in price; they pay more for the same amount of goods (Bhandari 2018). Understanding price elasticity helps to understand what elasticity means in general. Elasticity is a ratio between one variable change and another response to that change. This means that if there is an elasticity of 1, then if something increases by 1 percent, something else will increase by more than 1 percent — usually by at least 2 percent.
Petrol as Inelastic Demand Product
Petrol is an example of a product that has an inelastic demand curve, meaning that consumers will continue purchasing the same amount of petrol at any given price. This is because petrol is necessary for most people and cannot be easily substituted with other products. The demand for petrol is inelastic because it is necessary for many people. People need to drive and purchase petrol to keep their cars running and maintain their lifestyles.
If the price of petrol goes up, these consumers will still need to buy it to get around, so they will not cut down on the amount they buy. Instead, they may cut back on other things, such as entertainment or food, to accommodate the higher petrol prices (Bhandari 2018). The only thing that can reduce the demand for petrol cars is if no other alternatives are available. The unavailability does not mean there is no competition for petrol in the market; it just means that no good alternatives are available yet.
The demand for petrol is inelastic to price because the quantity demanded does not change when there is a price change. If the price were elastic, then demand would fall as prices rose. But petrol is needed by everyone who drives a car to get around, so as soon as its price goes up, people will still buy it anyway because they have no choice if they want to get around. There are several factors at work here: the price of petrol is affected by crude oil, which is traded on an international market (Bhandari 2018). Changes in the price of crude oil affect the cost of producing petrol, affecting its retail price. However, it is unlikely that you would be able to pass on these costs to consumers because they are already paying more than they would like and will not pay any more without resistance.
Secondly, most cars on our roads run on petrol, so people have little choice but to purchase it when they need it. This makes them less likely to buy less fuel when prices rise, as they cannot easily switch to another form of transport like public transport (Bhandari 2018). Thirdly, people who own cars are unlikely to sell them because they use them frequently, so even if they do not need their car every day, they could still justify owning one because it would be helpful on some days. Lastly, there are few substitute products for petrol. Few products can be used as an alternative fuel source for petrol. This makes it difficult for people to stop buying petrol when there is a price increase because they do not have any choice but to pay extra money for their transportation needs.
The price elasticity of demand is the responsiveness of the quantity demanded of a good to changes in its price. If a product is elastic, there are many substitutes available for consumers to choose from when the price of their usual brand goes up, and they will switch to another, more affordable brand (Bhandari 2018). If there is a high elasticity of demand for a product, then this means that when the price of the product goes up, people will be less likely to buy it. This could be because there are cheaper products on the market or because the customers can easily find ways to get around paying higher prices.
What if the Price of Petrol Becomes Elastic?
If the price of petrol could be elastic, people would be willing to use other alternatives. People can buy other alternatives such as electricity, solar power, or heat from a local supplier; furthermore, the price of petrol does not matter so much to the consumers. Other people may opt to commute involving a long walk, cycle ride or use public transport. If people live in a city with good public transport links, then petrol prices may not be as crucial for them as for someone who lives in a rural area with little alternative access to transport.
For many, the price of petrol is not set on a rational basis. The demand for petrol is price inelastic, meaning that if its price changes, the amount demanded will likely stay the same. This gives petrol companies an incentive to choose a high price because they know consumers will pay it. Over time, there have been more and more of these inelastic goods as consumers have greater purchasing power. The result has been that global prices of various commodities have surged significantly.
Reference
Bhandari, N. (2018). Hike in prices of petrol and its impact on demand and supply. International Journal for Advance Research and Development, 3(8), 33–37.