Inelastic demand for gasoline results in record profits for oil producers.

The relationship between price elasticity of demand and total revenue is such that when the demand is inelastic an increase in price results in an increase in total revenue.  A prime example of this is the increased profits of oil companies due to the inelastic demand for gasoline.  As you can see in the graph below, the demand curve for gasoline is very steep indicating that any increase in price results in very small reduction in demand.  This demand curve represents only the lower inelastic portion of the total demand curve for gasoline.  This graph represents the change in demand over a relatively short time period (one year). For example, from April 2007 to April 2008, the price of gasoline increased 75%, yet there was only a 1.8% decrease in traffice on roads and highways in the US with only a 2.6% decrease in total miles travelled. However, in the long term (30 years) per capita gasoline consumption has actually decreased primarily to a 70% increase in fuel economy of passenger vehicles.  In the short term, gasoline has inelastic demand, but over the long term, it has elastic demand linked to developments in vehicle efficiency and fuel economy.  Despite the increased price of oil and thus gasoline, producers such as Husky Energy are reporting record profits (doubled from $261 million to $560 million in one quarter) despite an increase in gasoline prices, clearly representing inelastic demand for gasoline and other oil based products.

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Citations

Vincent Geloso. (2008, July 24). Inelastic gas; Economists expected a sharp reaction to the rise in oil prices. Here's why it hasn't quite happened. National Post,FP.13. Retrieved November 27, 2011, from Canadian Newsstand Core. (Document ID: 1518806601).

Oil profits up on prices, oil-sands output; Canadian firms shrug off debt crisis in Europe. (2011, November 4). National Post,FP.5. Retrieved November 27, 2011, from Canadian Newsstand Core. (Document ID: 2504235921).

Changes in Demand: Why do you buy things on sale?

What do you think of when you hear the word "demand"?  Do you think of it as meaning something you're being asked to do?  Or do you think of it as meaning something that you would like to have?  In an economic sense it is the amount of some product that you as a consumer are willing and able to purchase.  Have you ever thought about why your demand for a product changes over time?  A few of the underlying factors that typically cause changes in demand for a product are a change in preferences, change in income, the price of related products, and future expectations.  Graphically when demand changes for a product there will be a shift in the price, the quantity supplied and the quantity demanded.  As we can see in Fig. 3-3 when there is an increase in the demand for wool sweaters due to a long cold winter in Odessa, the demand curve for wool experiences a rightward shift (from D1 to D2).  This results in a greater quantity demanded than can be supplied producing a shortage of wool.  The shortage causes an increase in price and a decrease in demand until a new equilibrium price ($700) and quantity (70 tonnes per year) is reached.

 When you look back at old photos of your family, you will clearly see a change in preference for clothing fashions.  As trends come and go, preferences for clothing styles change.  As new materials that reduce or eliminate the need to iron your clothes, you preferentially buy these iron free clothes.  As new technology is introduced you abandon your trusty flip phone for a new touch screen smart phone.  Over time preferences change and this will alter the demand for various products.
As you progress through your career, you will invariably increase your income.  This may reduce your demand for inferior products (students living on macaroni and cheese) and increase your demand for normal products (beef tenderloin).  Alternatively, if we hit a speed bump in our career and our income is reduced, we will have to save money by reverting to inferior products and reducing our consumption of normal products.  Additional increases in income may also increase our demand for products that are we previously couldn't afford and are not essential to live, such as vacations to tropical locations or private violin lessons.  Income is a very important factor when considering the demand for products.
The price of related products will affect demand.  Products may be substitutable (Coca Cola or Pepsi) or complementary (cars and gasoline).  When prices in one substitutable product increase due to manufacturing or transportation costs, the demand for it's substitute may increase as people are not willing to pay more for what in their mind is the "same thing".  An increase in price for a complementary product such as gasoline, may cause an increase in demand for smaller, more fuel efficient cars.  Next time you are at the grocery store and are about to choose a jar of pasta sauce, think about the reasons for purchasing the brand you do?  Does it have anything to do with the price of the other brands?
Finally, future expectations on the available supply, price, quality, or selection may change the demand for products.  If a price decrease (lower production costs or a sale) is expected, you may choose to delay your purchase which then alters the current demand for a product.  If you find a pair of shoes that fit really well, and you are not sure if they will still be available when you are ready to replace them, would you buy a second pair now?  When natural disasters are approaching (hurricanes or blizzards) people will demand more water, food, batteries, shovels, generators, and other emergency equipment.
In summary, have you ever been in the grocery store standing in line waiting for the person in front of you to pay for their order when they start questioning the cashier on what the price for an item should have been because they thought it was on sale?  When the cashier pulls out the flyer and explains that it was the jumbo size that was on sale not the family size, the person will say that they only wanted it because it was on sale.  Have you ever purchased anything just because it was on sale and was a good deal?  Then your demand for that product has been changed.  Next time ask yourself if you just want something or really need it?  But that's for another discussion.

Economic Games: Farmersi

To gain an understanding of economic principles you can read text books and look at graphs, but another useful tool is playing games utilizing economic principles.  One example is Farmersi (http://www.farmersi.net), which is based in the 1800's during the expansion into the west by the young United States.  This game demonstrates a limited mixed economy in that you typically have a choice to produce a grain crop or livestock as a farmer.  With a variety of economic conditions in each scenario (commodity prices, transportation costs, land costs and availability), you have to carefully choose what product to produce and when and where to sell which products.  The age old adage of buy low and sell high is very readily apparent.  When you first start a gamer of Farmersi, there is abundant public land available at a low price.  You should buy as much land at these low rates as possible (capital goods) to invest in future production (consumer goods).  Specializing in producing one product is another decision that must be made.  If you think producing only one product is a good idea because of the price for it, other competitors may have the same thoughts and this could increase supply above the current demand which then lowers the price for everyone.  With a limited amount of land available for your own use, you must decide what to produce depending on the cost of production and the price for the product on the local and export market.  Transportation costs must also be factored in when considering the exportation of goods.  If you try to maintain a mixed production, you may be able to use the sales of one product with a lower, but more consistent price to maintain income when the typically higher priced, but potentially more volatile product, drops to increases in supply or decrease in demand. 
  Demand and supply is of course the basis of most economic thinking and this game really demonstrates this relationship well.  As you produce and sell more of a product (wheat) the local price decreases.  If you were to export the wheat to another market, thus reducing the supply in the local market, the prices will increase in the local market.  You can also reduce supply by simply storing the wheat in a granary, which causes an increase in price as well.  Differences in supply and demand between the two markets (local and export) also gives you the option to do some price arbitrage, whereby you buy wheat in the local market at a lower price and sell it for a higher price in the export market.  Of course you have to take into account transportation cost to determine if this will be profitable.  You can increase supply of grain and livestock by investing in technology and education, which increases the efficiency of your production.  Profits can also be increased by technology and education by reducing production costs.  The earlier you can implement these improvements, the more time for them to be in effect and the greater their effects.
  When you try this game my advice is to invest in land first and then invest in technology and education to maximize your production efficiency.  Then you need to carefully consider local and export market prices and take into account transportation costs to determine where to sell your product.  In some instances you may be better off to sell only enough to cover costs in order to restrict supply and thus the prices in the future.  Good luck!

Production Possibilities Curves: The cost of education

In economics, production possibilities curves are used to model the outputs of an economy assuming there is full employment, the use of the best technology, and production efficiency.  Through these models it is also possible to visualize the law of increasing costs and the effect of technological change and capital accumulation on future growth.
The law of increasing costs, in the context of a whole economy, states that as the production on one item increases, the cost of producing each additional item of the same type increases.  The reason for this is that resources are scarce and some resources are better suited to the production of certain items.  If you are already using the best suited resources to produce an item, it will be more difficult or costlier (in wages, time, or quality) to recruit less well suited resources to produce more of that item.  You would then have to choose whether it is worth producing that one more item at the increased cost.  For example, by choosing to take distance education course to increase my education in accounting, I have chosen to give up some of my free time (i.e. time to spend with my family).  The more courses I take concurrently, the less free time I will have, but the greater my education in accounting will be (Fig. 1).

Technological changes and capital accumulation affect production possibilities curves by causing a shift in the curve to the right resulting in increased future growth.  The downside is that the investment in the future growth comes at the cost of current production, so the more you invest in technology or the production of capital goos, the lower current production of consumer goods will be, but the greater future growth will be (Figs. 2 & 3).  For example, if I were to stop my education after completing only the accelerated accounting certificate I could get a better paying job than I currently have now.  However, if I invested more in my education by completing the CGA program, I would qualify for a significantly better paying job further in the future.