Gasoline — Part 5
In a previous post, I estimated the following equation for the demand for gasoline (January 2002-December 2009):
where P is price in cents, U is unemployment in percentage terms (i.e. 7% unemployment equals U of 7), and δ equals monthly variation (because gasoline consumption differs substantially by month.)
In previous posts, I also estimated the price elasticity of demand, ε, for gasoline. We can also calculate an elasticity value for unemployment — this would tell us how much gasoline demand changes for a change in unemployment. Just as price has an impact on gasoline demand, so does unemployment. I’ll spare you the math — the procedure is exactly the same as outlined in this post.
Here is a graph of price elasticity of demand and unemployment elasticity of demand:
What is interesting about this graph is that it shows that gasoline consumption is more responsive to a change in unemployment than it is to a change in price. The higher (in absolute value terms) the elasticity number, the more responsive consumption is.
It’s a weird result, to be sure — it implies that price isn’t as important in changing demand as general economic well-being (or lack thereof). These elasticities are constantly changing; when either prices or unemployment rates soar, consumption rates are affected more by an additional increase in prices or unemployment.
