Which of the following is likely to have the most price elastic demand?

Which of the following is likely to have the most price elastic demand?

a. sailboats

b. good X in the short run compared to good X in the long run

c. gasoline

d. milk

Answer: c. gasoline

Price elasticity of demand is the ratio of percentage change in quantity demanded of a good to percentage change in its price. A higher value of the price elasticity of demand means that consumers are likely to respond to price changes and may change their consumption levels.

Among the given options, gasoline is likely to have the most price elastic demand for the following reasons:

Availability of substitutes: Gasoline has other possible means of transportation including using public transport, carpooling or buying fuel-efficient cars. This is because the availability of substitutes has also gone up and this leads to a high price elasticity of demand.

Consumption flexibility: The gasoline consumption is somewhat volatile and can be altered to some extent by limiting unnecessary trips or by combining several journeys in one, thus making it more sensitive to prices than basic goods such as milk.

The proportion of income spent: As gasoline accounts for a large part of the households’ budget, consumers are sensitive to the prices of gasoline.

Items such as sailboats (a) and milk (d) will have a low price elasticity of demand because they can be considered as a luxury or a basic necessity respectively. The price elasticity of a good in the short run compared to the long run (b) can differ, but for gasoline, the demand is regarded to be highly elastic in both the short and long runs.