Why is the demand for a Ford Car more 'elastic' than the demand for petrol?

Elasticity of demand refers to the sensitivity of demand in relation to price. In essence it measures how much the demand for a good changes in relation to its price. We know for most goods that the demand curve slopes downwards. If we plot the demand curves for a Ford Car and for petrol we can see the curve for petrol is steeper. This implies that if we increase the price by a fixed percentage, lets say 10%, we can see on the graphs that the demand for petrol falls by far less than the demand for Ford cars. This means that petrol is less sensitive to changes in price, hence it is less 'elastic'.
There are two main reasons for this. The first is that there are many substitutes for a Ford car, compared to petrol. If the price of a Ford car rises, it is feasible that many of those looking to buy a car will simply switch to other brands whose price has not increased, say Volkswagen or Honda. By contrast, for those consumers who regularly buy petrol, if the price of petrol goes up they will have little alternative and hence will continue to buy petrol despite the higher price.
Secondly is how strong these substitutes are. Note there are substitutes for petrol, for example diesel and to an extent other forms of transportation such as public transport. However these are weak substitutes, as the experience of consuming these is very different to consuming petrol. By contrast other brands of cars such as Volkswagen are strong substitutes for Ford cars, due to the fact that they provide a very similar experience. Hence due to having both more substitutes and stronger substitutes, an increase in the price of a Ford car is likely to see a larger decrease in demand compared to an increase in price of petrol.

Answered by Shantanu S. Economics tutor

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