Electric car vs Petrol car

Based on Koo in Asia One, he states that an electric car in Brunei is more expensive than a petrol car. This topic is further discussed in his article ‘Cheap petrol price will block electric car’ on 2nd October 2012.

Koo claims in his article, in an interview with The Brunei Times, Hiroshi Masuoka, a senior expert with Mitsubishi Motors Product Strategy Office said that the introduction of electrical cars in Brunei Darussalam may be difficult due to the extremely low petrol price in the country. From the economic view, when an influence on buying plans other than the price of the good changes, there will be a change in demand for that particular good. Electric car is a substitute of petrol car in Brunei. A substitute is a good that can be used in place of another good; it is one of the main factors that affect the demand curve. When the price of a substitute of a good is high, the demand for that specific good is high; there is a positive relationship in between the two variables. As we apply the economic theory to the situation, we know that since the price of electric car is more expensive than a petrol car, the demand for petrol car will increase. Buyers are more willing to pay for good that is in a lower price. This can be proven using Law of demand; when other things remaining the same, the higher price of a good, the smaller is the quantity demanded; there is a negative relationship.

Diagram 1 shows the change in demand in petrol car in Brunei when the price of its substitute (electric car) is high. D1 illustrates the initial demand curve of petrol car, whereas D2 is the new demand curve. From the graph shown, we can see that when the price of petrol car remains the same, demand in petrol car increases as the price of its substitute (electric car) increases. The demand curve of petrol car shifts rightwards. This phenomenon occurs because when the price of substitute of a good is high, people will be more willing to pay for that good instead of its substitute. Now, we are able to see the reason why is petrol car a threat to electric car in Brunei.

Besides that, Koo also states that in Japan and the United States, where the cost of petrol was high, more people were turning towards electric cars in order to save money. He further explains that in Japan, gas was approximately US$2 (S$2.45) per litre at the pumps. The same economic theory applies here, as the cost of petrol in Japan and United States is high, cost of using petrol car becomes high; therefore, buyers become more willing to spend on its substitute, which is an electric car. This explains why demand for electric car is high in Japan and United States but low in Brunei.

In the article, Koo highlighted that the demand of electric car in Brunei is affected by the price of petrol car, whereas demand of petrol car in Japan and United States is affected by electric car. In this event, we know that electric car is a close substitute of petrol car in Brunei, and a petrol car is a close substitute of electric car in Japan and United States. The closer the substitutes for a good of service, the more elastic are the demand for the good or service. When a good has an elastic demand, percentage change in quantity demanded will be greater than the percentage change in price. This can be observed from Diagram 2.

Diagram 2 shows the demand curve of electric car and petrol car; it has an elastic demand because a significant percentage change in quantity demanded will occur when there is a small percentage change in the price of good. Elasticity is the measure of people’s responsiveness of the quantity demanded of a good when there is a change in its price, other things remaining the same. Therefore, we can say that electric car and petrol car are both elastic because when the price of its substitute changes, people’s responsiveness towards the good’s demanded is high.

Next, we will expect an increase of quantity supply in electric car in Brunei, and petrol car in Japan and United States. A change in supply is affected by the prices of related goods produced. Supply of good increases when the price of a substitute in production falls; it decreases when the price of substitute in production increases. Thus, supply of electric car in Brunei will increase whereas the supply of petrol car will fall. This happens because producers are more willing to allocate the same factors of production on a good which has a higher price. This is explained by the Law of Supply; when other things remaining the same, the higher the price of a good, the greater the quantity supplied, and vice versa; there is a positive relationship. Same phenomenon will occur in Japan and United States, where the quantity supply of petrol car will increase and quantity supply of electric car will decrease.

To conclude the situation, a shortage of petrol car will occur in Brunei; quantity supplied of petrol car will not meet the quantity demanded in the market. The same theory applies to Japan and United States, where electric car will have a shortage in the market. To solve the situation, price of petrol car in Brunei has to be increased to a certain price at which the quantity demanded will be equal to the quantity supplied, and market equilibrium is achieved. 

Diagram 3 shows the market equilibrium graph; P1 is the initial price of petrol car in Brunei whereas P2 is the increased price. Market equilibrium is achieved at the point where quantity demanded equals to quantity supplied.

In Japan and United States, price of electric car has to be raised to a price until quantity demanded will be equal to the quantity supplied, and market equilibrium is achieved.

Source from: http://motoring.asiaone.com/print/Motoring/News/Story/A1Story20121002-374978.html