On Vacation, Does the Law of Demand Apply?

I’m on vacation this week. But no, I’m not just saying this to get out of posting this week, or to brag. Americans really have started going back to the normal routine of vacations after a long break during the pandemic.

You might think that the high price of gasoline will slow down summer travel. Not so, according to estimates from AAA. While the total number of estimated travelers for Independence Day weekend is still slightly below Summer 2019 (by about 1 million travelers), travel by car is predicted to be just above 2019 levels (by about 0.5 million travelers), with 42 million Americans traveling by car. Air travel has been a mess lately and quite expensive (even compared to pre-pandemic levels), and is predicated to be about 0.5 million below 2019. Bus/train/cruise travel is still the big loser, well above the past two summers, but still 1 million travelers below 2019. (These are all estimates, of course, but AAA is in the business of knowing this data well.)

What gives? Basic economic theory would tell us that if the price of something increases, people should buy less of it. And traveling by car is much more expensive than in Summer 2019. We should also think about substitutes, and airline travel is certainly a substitute for car travel. But if we look at what has happened to both airfares and gasoline prices since July 2019, we can see that gasoline prices have increased much more (about 60% vs. 25% for airfares).

So, do we just throw up our hands and say: “it’s just too complicated, lots of factors at play”?

Here’s my attempt at a partial answer. First, gasoline is a small share of total consumption in the US. As of the end of 2021, it was less than 4%. It’s probably a bit higher now, but still a small part of consumption for most families. For goods that are a small portion of consumption, we expect demand to be inelastic.

Also, Independence Day is the high holiday of American summers. If you are going to cut back on gasoline consumption sometime this summer, you will likely do it on some other random weekend, not on July 4th. Preferences for celebrating Independence Day are “lexicographic” in economists’ jargon — this particular weekend is valued above all other weekends no matter the price.

Finally, we should always remember that there are other margins on which those 42 million Americans might adjust when they traveled by car. Perhaps they drove, but not as far as when gas $2.50. Perhaps they drove the same distance as past years, but stayed for fewer days. Or maybe they prepared more meals at their campsite, rather than dining out at restaurants (which are often understaffed lately anyway).

The American love of the automobile is clear, as is our love of summer vacations. But don’t count out the Law of Demand just yet.

One thought on “On Vacation, Does the Law of Demand Apply?

  1. StickerShockTrooper July 6, 2022 / 9:51 am

    Still cheaper and more flexible to drive a family of 4 (or a road trip with 3 friends) compared to 4 bus or train tickets. For most vacation options, the car IS the substitute good.


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