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Monday, August 11, 2008

Demand curves are not downward sloping?

The results from a survey at WSOC TV in Charlotte is interesting:

Gas locally is around $3.85, and the highest it reached was around $4.09, thus the drop is not dramatic but it is real. Perhaps people are permanently changing their behavior.


Most likely, this is an example of talk being cheap.

If we assume that the poll is accurate, there are a few different explanations of why.

People may have, as you suggested, changed their behavior on a semi-permanent basis with the anticipation that gasoline prices will rise again in the near future. They may have already incurred most of the switching costs associated with driving less and do not want to go back because they save some amount of money regardless of the price of gasoline (assuming it is above zero). Furthermore, their newly-acquired habit is beneficial to them. Should gasoline prices increase again, they will not have to alter their behavior.

Another explanation is that while gasoline prices have decreased, other prices have increased simultaneously creating an income effect. The net result is that drivers do not drive more or less than before.

Still another explanation is seasonal demand. People drive more during the summer. As the summer is winding down, people would tend to drive less. However, at the same time, gasoline prices are decreasing encouraging people to drive more. The net result is that people drive the same amount.
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