Factors, Fluctuating Gasoline Prices

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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…show more content…
They tried not to drive without necessity, buy products at one place, buy products for the whole week… 3. There was a trend to reduce driving distance: migration toward city centers and workplaces. SLIDE 8 So, what were the reasons that caused the increase in price without the decrease in demand? (Consumers irresponsiveness to price changes / inelasticity of gasoline demand): 1. Consumers tastes and preferences. Big, safe and prestigious car vs. small fuel saving cars. 2. Consumers income and amount spend on a product in relation to income. With high income consumers are less affected by gasoline prices. In 1981 5% of personal consumers income was spend for gasoline vs. 3% in 2006. 3-5 % is a relatively small part of the total income. As we know, the less part of income is spend for the product the less elastic demand for it is. 3. Availability of substitute goods. As we know, there is No substitute for gasoline. 4. The amount of time needed to adjust to changes in price. The more time customers need to adjust to price rise, the more inelastic demand for product is and vice versa. SLIDE 9 Besides, there was another reason that limited consumers responsiveness for gas prices. That was the difference between nominal and real price. While nominal price for gas had increased, the real or inflation adjusted price (in terms of spending power) dropped since 1980s. $2.74 in 2006 vs.

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