Tuesday, April 12, 2011

Need the help of a math guru to check my work on an Elasticity problem...Be gentle. I am willing to learn..:)

I need the help of a math guru. Check my analysis below and tell me if I am right, wrong, or somewhere in the middle. Be nice...math is REALLY not my strong point, but I am willing to learn... :)
This graphic in today's NYTimes provides an opportunity of look at the elasticity of demand for gasoline.  It is not a perfect measurement because it is not in terms of quantity demanded for gasoline, but miles driven.  I am going to assume there is an inverse relationship between the price of gas and miles driven.  

Source: NYTimes

Elasticity is determined by taking the percentage change in the quantity divided by the percentage change in price. I am guesstimating, but I would say in 2005 miles driven is approx. 2.9625 (1/4 of .5 trillions miles plus 2.95 trillion miles) and 3.0 Trillion in 2011. That makes the percentage change from 2005 to 2011 +1.27%. 
The percentage change in price from 2005 ($2.00) to 2011 ($3.79) is 90% (rounded up slightly). 
Using the Elasticity of Demand equation we divide 1.27% by 90%. This yields .014.  A number less than 1 means demand is relatively INELASTIC, which suggests the change in quantity demanded is not very responsive to changes in price.  This is a VERY small number and indicates demand is almost perfectly inelastic (the demand curve is downward sloping but almost vertical)
Does this make sense? Thanks!
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