Factors, Fluctuating Gasoline Prices
The case study of the article from Wall Street Journal, dated from March 2008.
AMERICANS START TO CURB THEIR THIRST FOR GASOLINE.
SLIDE 2 In recent years, the world 's appetite for gasoline and diesel fuel grew so quickly that suppliers of these fuels had a difficult time keeping up with demand. We all know the situation with gasoline prices for the resent several years. The prices for gasoline had been changed rapidly. Mostly increasing, while the demand for it did not. For example, gasoline prices by Feb. 2008 rose to an average of $3.13 a gallon, that is up to 40% from $2.24 in Jan 2007. ( with the price elasticity 1%/40% = 0,025), and up to 62% from 2003. (with the price elasticity 1%/62% = 0,016). Yet, demand continued to grow at an average 1.15% a year by 2006. Someone could ask why the rise of price did not caused the reduce of demand. The answer is that in this case we face the shift of demand (2003 – 2006) due to increase in customers income, and the cars appeared to be more affordable for most people, especially favorable were huge cars (and very fuel inefficient), that perceived to be more safe and prestigious. As we know, increase in demand for complementary good 1 causes the increase of demand for complementary good 2 (cars and fuel). As cars can not run without fuel. The increase of demand for gasoline was the response to the increased demand for cars, and market responded for that with the increase of gasoline prices (shift in equilibrium price).
SLIDE 3 Consumers were better able to absorb the increase in gasoline prices and pinch pennies at less price stores like Wall mart and keep driven, because : 1.Consumers could not stop driving, driving could be the last thing they could refuse to do. And they could not drive without gasoline – as there are no substitutes for gasoline (unless they switch for other fuel-source car) 2. Consumers thought that was only shot- term increase in gasoline prices, and
AMERICANS START TO CURB THEIR THIRST FOR GASOLINE.
SLIDE 2 In recent years, the world 's appetite for gasoline and diesel fuel grew so quickly that suppliers of these fuels had a difficult time keeping up with demand. We all know the situation with gasoline prices for the resent several years. The prices for gasoline had been changed rapidly. Mostly increasing, while the demand for it did not. For example, gasoline prices by Feb. 2008 rose to an average of $3.13 a gallon, that is up to 40% from $2.24 in Jan 2007. ( with the price elasticity 1%/40% = 0,025), and up to 62% from 2003. (with the price elasticity 1%/62% = 0,016). Yet, demand continued to grow at an average 1.15% a year by 2006. Someone could ask why the rise of price did not caused the reduce of demand. The answer is that in this case we face the shift of demand (2003 – 2006) due to increase in customers income, and the cars appeared to be more affordable for most people, especially favorable were huge cars (and very fuel inefficient), that perceived to be more safe and prestigious. As we know, increase in demand for complementary good 1 causes the increase of demand for complementary good 2 (cars and fuel). As cars can not run without fuel. The increase of demand for gasoline was the response to the increased demand for cars, and market responded for that with the increase of gasoline prices (shift in equilibrium price).
SLIDE 3 Consumers were better able to absorb the increase in gasoline prices and pinch pennies at less price stores like Wall mart and keep driven, because : 1.Consumers could not stop driving, driving could be the last thing they could refuse to do. And they could not drive without gasoline – as there are no substitutes for gasoline (unless they switch for other fuel-source car) 2. Consumers thought that was only shot- term increase in gasoline prices, and