Is the ability to work from home affecting the price elasticity of demand for gas?

See Consumers Can Just Say ‘No’ to High Gas Prices: Commuters today have far more options to curb fuel usage than they did decades ago. They hold the key to alleviating the world’s fuel-shortage problem. by Justin Lahart and Jinjoo Lee of The WSJ. Excerpts:

"One of things that makes high gasoline prices so difficult for families is that, unlike something like a TV that has shot up in price, they have no option but to pay.

But with the increased ability to work from home the pandemic has brought on, that isn’t as true as it was in the past. Indeed, although the evidence is preliminary, it looks as if many Americans might have responded to the jump in gasoline prices by reducing trips to work."

"Commuting-fuel use accounts for around 30% of gasoline consumption"

"Moreover, while people have always had some flexibility when it comes to their commutes—they can start carpooling or learn the local bus route—in the short run the options are limited. That is a big reason gasoline is considered relatively price inelastic versus many other items: When prices go up, demand [it should actually be quantity demanded since the demand line does not move when price changes] goes down only so much."

"A Census survey conducted over the 13 days ended April 11, when regular gasoline averaged about $4.13 a gallon, showed an estimated 67.3 million people worked from home at least once a week. In a survey conducted over the 13 days ended June 13, when a gallon averaged $4.94, the estimated number of people working from home at least once rose to 69.7 million."

"it is difficult to pinpoint exactly how much of the commuting decline is due to more people getting sick from Covid-19 versus those who are experiencing sticker shock from fuel prices."

"Christopher Knittel, a Massachusetts Institute of Technology economist who has conducted research on consumer responses to gasoline-price changes, thinks the option to work from home has probably led to more price elasticity. That should reduce price volatility and, all else being equal, make prices lower as well."

"consumers generally seem to have become more sensitive to gasoline prices, says energy economist Philip Verleger. He calculates that before 2000, spending on motor fuels as a share of total consumer spending almost doubled when gasoline prices doubled. In recent years, that effect has been halved such that a doubling of gasoline prices would yield just a 50% increase in motor-fuels spending."

Price elasticity of demand-It tells us how responsive quantity demanded (Q_d)is to a change in price. That is, when price changes, will the change in Q_d be large or small? The bigger the change in Q_d  the greater will be the price elasticity of demand.

We will use E_d to stand for price elasticity of demand. Here is the definition

E_d = %DQ_d /%DP

where D (the Greek letter delta) means "change in."

OR  E_d = % change in Q_d divided by % change in P

Determinants of price elasticity of demand

1. Share of the budget going to a good

If this is low, then price elasticity of demand is low or inelastic. For example, if you only buy one box of cooking salt a year and the price doubles from $1 to $2, you will probably still buy that one box because this spending makes up a very small share of your budget.

If this is high, then price elasticity of demand is high or elastic. But if the price of cars doubles, you will probably buy fewer cars since that takes up a much larger share of your budget.

2. Adjustment time. The article mentions that "in the short run the options are limited."

In the short-run price elasticity of demand is low or inelastic. For example, if the price of gas doubles, you will probably only reduce your quantity purchased slightly because you still need to get to school and work.

In the long-run price elasticity of demand is high or elastic. In the long-run, when you have more time to adjust to the higher gas prices, you can shop around and buy a car with better mileage, move closer to your job, get into a car pool or find a bus route. So your quantity purchased of gas will decrease more than in the short-run.

3. Number of close substitutes. Working from home is a substitute for driving. With a new substitute, elasticity for gas goes up.

If there are few substitutes for a good, then price elasticity of demand is low or inelastic. For example, if there is a drug you need to take (or something like insulin for diabetics), there will be few substitutes. So if the price increases, your quantity purchased will not change much because you must buy this drug.

If there are many substitutes for a good, then price elasticity of demand is high or elastic. For example, if the price of potato chips increases, your decrease in quantity purchased will be great because there are many substitutes for potato chips. You can get nachos, pretzels, corn chips, etc. instead.

The article also mentions that the higher elasticity will "make prices lower as well." How does this work? Let's look at the graph below.

What if there is a reduction in the supply of gas? If we have demand 1 (D1), price will go up quite a bit (as shown by the long green line). This is inelastic demand.

But if demand becomes more elastic and we move to demand 2 (D2), the same decrease in supply means a much smaller increase in price (as shown by the short green line). So if we have more elastic demand (D2), the price is lower than at D1 when supply decreases.

Related posts (which generally discuss how elasticity determines the size of a price change due to a tax):

Consumers in Maryland received 72% of the decrease in the state gas tax-does that mean that demand is less elastic than supply? (2022)

An example of a product price rising less than an increase in a tax (2020)

If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold? (2010)

How Firms’ Reaction To An Excise Tax Determines The Market Outcome (2020)

Does The Wall Street Journal's Explanation Of The Gas Tax Make Sense? (2008)