Microeconomics Article Review Project: Elasticity of Demand Analysis

This report provides an analysis of the microeconomic concept of elasticity of demand, drawing on three selected articles. The first article examines the rising gas prices in Vancouver, attributing the increase to supply shortages and potential carbon tax increases. The second article focuses on the...Read More

Running head: MICROECONOMICS
Microeconomics
Name of the Student
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Table of Contents
Introduction................................................................................................................................2
Summary of chosen articles.......................................................................................................2
Analysis of the articles using economic concepts......................................................................3
Conclusion..................................................................................................................................5
References..................................................................................................................................6

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Introduction
Elasticity of demand is an important microeconomics concept. Elasticity measures
responsiveness of demand due to a change in factors determining demand. Price elasticity of
demand measures the proportionate change in demand following a corresponding
proportionate change in price of the particular good. If percentage in demand is less than the
percentage change in price, then demand is relatively inelastic (Kreps, 2019). When demand
changes at a proportionately higher percentage than price, then demand is considered as
relatively elastic. The paper analyzes three articles related to elasticity of demand.
Microeconomic concepts related to each of the articles are discussed along with particular
reference to the aspects.
Summary of chosen articles
For purpose of the paper three articles are selected. The first article is related to rise in
metro gas prices in Vancouver. Price of gas is expected to increases to $1.50 per liter. Gas
price now are moving around a high range of $1.43. During this time of season there is
neither a high demand nor a shortage of supply. With constraint in demand and supply price
might be moved to a high level of $1.52 (Lazatin, 2018). Some analysts have pointed out that
prices are rising mainly due to shutting down of two refineries supplying gas. Higher carbon
tax is another factor that might push gas prices high. The higher cost of gas put additional
cost burden on average family for filling their cars.
The second article is related to elasticity of Dairy demand. With a decline in demand
of dairies from government dairy in US has become more elastic in nature. This has made
prices more reactive to demand for customers. Consumption of dairy is usually relatively
inelastic in nature. That means demand for basic dairy products such as butter, milk or cheese
change a little for any given change in price. However, with passes of time the situation

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however has changed. Higher prices now have a direct impact on the consumption of dairy
products. Previously a strong demand for dairy products were gone to US government.
Because of the strong demand from government overall demand always remain less
responsive for a change in price making demand price inelastic (Merlo, 2019). The situation
however has changed now. With a subsequent decline in demand from government and stable
price of alterative beverages make the demand for dairy product relatively elastic.
The third article is concerned with price elasticity of demand gasoline. In response to
higher fuel price people generally reduce their consumption of fuel. When fuel price
increases, people start to use pool car for going to school or work, lower the frequency of
going to supermarket or post office. A study conducted on elasticity of demand for gasoline
in United State found that there is a wide variation in the elasticity of demand for gasoline in
United State. The short run elasticity of demand for gasoline is found to be -0.26 (Moffat,
2019). In the long run people are however able to adjust their demand for fuel. This increases
the estimated measure of elasticity in the long run as -0.58.
Analysis of the articles using economic concepts
Price elasticity of demand of a particular product depends on a number of various
factors. Elasticity of demand measures the change in demand following the change in price
(Cowell, 2018). In case of gas prices in Metro Vancouver follows an upward rising trend.
Price of gas now is around $1.43 per litre. Before that, price followed a continuous increase.
The price mostly increases due to supply side factors. Recently two refineries supplying gas
have been shut down. The interruption of supply due to closure of refineries creates a supply
side shortage increasing price of gas. A further upward pressure on price is coming due to the
prospect increase in carbon tax. Now change in household expenditure following the increase
in price depends on the magnitude of elasticity of demand (Baumol & Blinder, 2015). Higher

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the magnitude of elasticity smaller is the increase in household expenditure for filling their
cars and vice versa.
In case of dairy product in United State demand is now recorded to be more elastic.
Sources of demand and number of available substitutes are the two important determinant of
price elasticity of demand. Demand for dairy product was initially price inelastic in nature.
That means, proportionate change in demand is less than proportionate change in price. Dairy
producers therefore previously not suffered much from a price increase as revenue increases
from the decision to increase price. One primary reason for inelastic demand for dairy
product was large amount of demand generated by the government of United State. As
government no longer remained the best customers of dairy products, there is a large decline
in the demand for dairy products making the demand relatively more elastic (Cowen &
Tabarrok, 2015). That means proportionate change in demand is now larger than the
proportionate increase in price. This imposes a threat of lower revenue from any further
increase in price. Another factor making the demand more elastic is the availability of
different beverage alternatives having a more stable price compared to fluid milk.
Elasticity of some products varies overtime. The long run elasticity of some products
is larger than the short run elasticity. One such example is elasticity of gasoline. The short run
elasticity of gasoline was found to be -0.26. That means 10 percent increase in price reduces
demand by 2.6 percent. In the long run, as people are able to adjust their demand more as
compared to short run, elasticity increases (Mochrie, 2015). The long run elasticity of
gasoline is estimated to be -0.58. This means, in the long run 10 percent increase in price
reduces demand by 5.8 percent.

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Conclusion
The paper analyzes elasticity of demand for different product selected from three
different articles. The price of gas in Vancouver is on the rise. Two factors explaining higher
price of gas are shortage of supply and increases in carbon tax. The extent of change in
household expenditure depends on the associated elasticity of demand. In United State, dairy
products are facing a more elastic demand due to a reduction in demand of government of
United State. The elasticity of gasoline in the short run is lower compared to the elasticity in
the long run showing a greater ability to adjust for a change in fuel price in a relatively longer
time horizon.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press.
Lazatin, E. (2018). Metro Vancouver gas prices are on the rise again. CKNW. Retrieved 7
August 2019, from https://globalnews.ca/news/4047578/metro-vancouver-gas-prices-
are-on-the-rise-again/
Merlo, C. (2019). Why Dairy Demand Has Become More Elastic. AgWeb. Retrieved 7
August 2019, from https://www.agweb.com/article/why-dairy-demand-has-become-
more-elastic-NAA-catherine-merlo
Mochrie, R. (2015). Intermediate microeconomics. Macmillan International Higher
Education.
Moffat, M. (2019). What's the Price Elasticity of Demand for Gasoline? ThoughtCo.
Retrieved 7 August 2019, from https://www.thoughtco.com/price-elasticity-of-
demand-for-gasoline-1147841