How Much is that Increase in MPG Really Worth?

With fuel prices near the $4 per gallon level, there has been a lot of discussion in the media about fuel economy.  Last week, on the National Public Radio program, Marketplace, I was listening to a story about the rising demand for fuel efficient cars, and I was struck by this quote:

Jonathan Banks follows the used car market at the National Automobile Dealers Association. He says prices on used Prius models are up 30 percent since the beginning of the year. That’s more than for other used cars, though those are also in high demand.

Thirty percent seemed to me to be a quite a large price increase, and I decided to take a closer look at how fuel costs and fuel economy are related.

MPG vs. GPM

Most of us are familar with MPG as a measure of fuel economy, but it actually not the most intuitive measure to use.  The problem with MPG is that it is inversely related to fuel consumption, and this can lead to misperceptions about the cost savings from an increase in MPG.

This effect is best illustrated with a graph.  The graph below shows the cost of driving 10,000 miles for various measures of MPG.  I assume a gasoline price of $4 per gallon.

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