The University of New Mexico campus is mobbed with bicycles these days. The explanation seems obvious. The price of gasoline slipped below $3.50 per gallon this week, which seems like a bargain compared to the prices we were paying over the summer. But it's still 70 cents higher than last year at this time. Still, lots of people are driving as much as they ever did. But not these students. What's going on here?
The explanation is actually a bit more subtle than simply the price of gas. Lots of people have modified their behavior very little. An interesting note today from the Congressional Budget Office suggests that, for most of us, a rise in gas prices causes very little change in behavior:
Between 2003 and 2007, gas prices increased from $1.50 to more than $3.00 per gallon. Vehicle miles driven, driving speeds, and the purchase of larger vehicles have all responded only modestly despite the dramatic increase in prices.
Economists call this "elasticity". When elasticity is low, we keep using a commodity even if its price goes up. But the overall numbers hide something interesting about elasticity. Folks who have a lot of money can afford to ignore the price at the pump, buy something big, and drive it as much as they want. Folks who are poorer (like students) cannot. Elasticity is in significant part a measure of the people at the bottom of the economic ladder who have to do without when the price goes up.
There's also a second issue involved – what economists call "substitutability". In order to behave elastically, you have to have something else to switch to. If the price of rice goes through the roof, for example, you might switch to wheat for your staple grain. If you live too far from your job to ride a bike, and there's no bus service, you've got no substitute. You're inelastic, whether you like it or not.
For all those students I'm seeing on bikes at UNM, a bicycle seems to be working as a substitute for a car. They're an example of the elasticity in this system.