Based
on the article edited by Wallace in Thomson Reuter, MasterCard’s SpendingPulse
reported on 7 August 2012, U.S. gasoline demand fall as the price rise due to
oil leakage of more than 1000 barrels of oil at Midwest's
largest refineries and a crude oil artery in Wisconsin. However, the yearly
gasoline consumption is still lower than previous year.
In
my opinion, the shortage of gasoline demand will cause the price to increase
because when there is a limited supply of gasoline that the producer or patrol
station can offer to consumer, consumer will be desperate for gasoline. However,
they are unable to force the producer to produce more than they plan.
Therefore, some producer will take advantage of the situation by not increasing
their output unless the price increases. Here, a strong market force enters to
increase the price (from P1 to P2) while reducing the
shortage (from Q2 to Q3) because it decreases the
quantity demanded and increases the quantity supplied. This is because when the
gasoline price increases, people tend to buy or use less gasoline; however,
producers are more than willing to produce gasoline when the price is high.
Hence, the market force will pushes the price higher until it reach a point
where both buyers and producers are willing and able to buy and produce the
amount of gasoline demanded, which is also called the equilibrium price [point
(Q2, P2)], as showed in Diagram 1
Furthermore,
I believe that gasoline is a relatively inelastic good. This is because
consumers only show slight response towards the change in price of gasoline.
This means that the percentage change in the quantity demanded is less than the
percentage change in price of gasoline. So, the consumers are less price
sensitive toward the change of gasoline price. Gasoline is goods that are
required by everyone in every day in order for them to reach their respective
destination. However, consumers are not totally unaffected at all by the
gasoline price. This is to say, consumers might want to change their way of
using the gasoline; in term of using it more wisely when the price rises. Therefore,
consumers who are more sensitive toward the gasoline price increment may change
the way they reach their destination.
Some
people may decide to change their car into a more fuel-efficient car such as
hybrid car while others may decide to travel less by car, either by using
alternative transport mode or traveling less in general. When the gasoline price increases, people
might want to reduce the amount of driving and increase the fuel efficiency of
driving such as changing their driving behaviour by slower acceleration or
reduce vehicle speed so that the vehicle will not take up too much gasoline
while driving. Some people might also decide to use alternative public
transport such as bus and LRT instead of personal transport so that they do not
have to spend too much on gasoline cost. Other than that, some people might
even want to change their car permanently into a fuel efficient vehicle which
is the hybrid car. Hybrid cars are created in a concept where it is powered by
battery power engine in order to reduce the carbon dioxide release to the
atmosphere as less gasoline burned. Furthermore, hybrid car user can minimize
the gasoline consumption if they travel without exist the power limit by the
battery.
However,
of all the factors that might affect the elasticity of gasoline demand, income
has the highest probability that will affect consumer’s price sensitivity
towards the change of gasoline price. High income people tend to be less price
sensitive than low income people. This is because when people have higher
income, their purchasing power increase, they will be less concern of whether
the gasoline price increases or not as it will not affect them. For them,
gasoline may be necessity goods. So, the income elasticity of gasoline demand
is inelastic as income increase. On the other hand, for low income people,
gasoline may be a luxury good. When the price of gasoline increase while other
influences remain unchanged, people will feel poorer, they will not be able to
purchase the same amount of gasoline as they previously do. They will be more
price sensitive and reduce the use of gasoline or change their driving
behaviour to reduce the gasoline cost. Therefore, income elasticity of gasoline
demand is elastic for lower income people.
The
increment of gasoline price benefits the environment as the quantity demanded
of gasoline (gasoline consumption) decreases. When gasoline price increase, the
quantity demand for its complement goods which is convenient car will decrease.
This is because people will prefer to use public transports or even change
their car into a fuel efficient car in order to curb the constant increment of
gasoline price. This in turn safe guards the environment from air pollution.
In
conclusion, the increment of gasoline price is due to shortage, where quantity
demanded is less than quantity supplied. This caused the market forces to push
the price higher to reach the market equilibrium. Though, gasoline may be
relatively inelastic, but consumers may still make slight changes in term of
the ways they of use gasoline, such as changing personal car into a fuel
efficient car, use public transport and change their driving behaviour to
reduce gasoline consumption. It is also identified that level of income has
huge impact on income elasticity of gasoline demand, where gasoline is income
inelastic for high income people and income elastic for low income people.
Source from : http://www.reuters.com/article/2012/08/07/us-usa-gasoline-demand-idUSBRE87616320120807
Written by : Chong Li Min
Source from : http://www.reuters.com/article/2012/08/07/us-usa-gasoline-demand-idUSBRE87616320120807
Written by : Chong Li Min
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