Energy price elasticity measures the percentage change in energy consumption against a percentage ch...........

Economic Affairs Energy

Energy price elasticity measures the percentage change in energy consumption against a percentage change in energy price. Why are generally energy prices relatively inelastic?

1. Energy as a commodity of consumption comes in the category of basic necessities.

2. Energy as an overall commodity does not have close substitutes of its own.

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

Statement 1 and 2: It is generally accepted that energy price is likely to be inelastic due to its basic nature of necessity (since people won’t reduce their consumption much) and the lack of fuel substitutes (if there were substitutes, competition would have led to an overall price reduction).
Price elasticity for India ranges from -0.06 to -0.15. This means that price is inelastic or insensitive. The inelastic price in India could be explained by several reasons such as fuel subsidy by the state and lack of alternative mode of fuel substitution especially for the transportation sector.