Question

The following news was printed in the Economic Times:
"Narrow petrol-diesel price gap and higher price of diesel cars alter buyer preference."
Explain this statements linking it to the concept of elasticity of demand.

Answer 1

Buyer's preferences between diesel and petrol cars is significantly influenced by the relative prices of these fuels. In India, people have high preference for diesel cars, despite their higher price compared with petrol cars.This is because, diesel has been much cheaper than petrol. So the elasticity of demand for diesel cars has been low. However, in the recent past the gap between diesel and petrol price has tended to shrink. Accordingly, buyer's preference are likely to change. Low price difference between petrol and diesel (along with the fact that the diesel cars are more expensive) is expected to induce the buyers to shift from diesel cars to petrol cars. It implies a situation when elasticity of demand for diesel cars is expected to rise. A rise in price of diesel car will prompt many buyers to shift from diesel to petrol cars.