US Gasoline Prices
DEMAND FOR GASOLINE
According to the law of demand, when the price of a good and the quantity demanded have an inverse relationship. When the price of a good increases, the quantity demanded decreases. There are various factors affecting the demand for gasoline. These include:
1. The availability and prices of substitutes and complements:
A good is referred to as a substitute for another good, when it can be used as a replacement for the good. When the price of one good goes up, the demand for the substitute good increases. For instance, a Kellogg’s breakfast cereal and Cheerios are substitutes. We will consider the substitutes for gasoline. Gasoline prices are the chief determinants of the total fuel rates. When the gasoline rates go up, the demand for the substitutes, which are alternate fuels go up. But when the demand for the substitute alternate fuels increases, their rates increase as well. *afdc
Other substitutes for gasoline include electricity and natural gas. But a very small portion of the transportation industry relies on these alternate fuels. Thus when the prices of gasoline increases, there isn’t too large an effect on demand since the substitutes cannot effectively replace the function that gasoline has in the transportation industry.
Cars and gasoline can be considered to be complements. If the price of gasoline decreases, people may be more open to factoring in this element while buying a new car. When the price of gasoline goes up, the quantity of cars demanded may not necessarily decrease, but people would want to consider more fuel efficient options for the purchase of their new car.
2. Effects depending on geographical areas
Hilke A Kayser, Gasoline demand and car choice: estimating gasoline demand using household information, Energy Economics, Volume 22, Issue 3, 1 June 2000, Pages 331-348, ISSN 0140-9883, http://dx.doi.org/10.1016/S0140-9883(99)00043-2. (http://www.sciencedirect.com/science/article/pii/S0140988399000432)
According to the law of demand, when the price of a good and the quantity demanded have an inverse relationship. When the price of a good increases, the quantity demanded decreases. There are various factors affecting the demand for gasoline. These include:
1. The availability and prices of substitutes and complements:
A good is referred to as a substitute for another good, when it can be used as a replacement for the good. When the price of one good goes up, the demand for the substitute good increases. For instance, a Kellogg’s breakfast cereal and Cheerios are substitutes. We will consider the substitutes for gasoline. Gasoline prices are the chief determinants of the total fuel rates. When the gasoline rates go up, the demand for the substitutes, which are alternate fuels go up. But when the demand for the substitute alternate fuels increases, their rates increase as well. *afdc
Other substitutes for gasoline include electricity and natural gas. But a very small portion of the transportation industry relies on these alternate fuels. Thus when the prices of gasoline increases, there isn’t too large an effect on demand since the substitutes cannot effectively replace the function that gasoline has in the transportation industry.
Cars and gasoline can be considered to be complements. If the price of gasoline decreases, people may be more open to factoring in this element while buying a new car. When the price of gasoline goes up, the quantity of cars demanded may not necessarily decrease, but people would want to consider more fuel efficient options for the purchase of their new car.
2. Effects depending on geographical areas
Hilke A Kayser, Gasoline demand and car choice: estimating gasoline demand using household information, Energy Economics, Volume 22, Issue 3, 1 June 2000, Pages 331-348, ISSN 0140-9883, http://dx.doi.org/10.1016/S0140-9883(99)00043-2. (http://www.sciencedirect.com/science/article/pii/S0140988399000432)