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). |
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