Based on recent news on CBS
dated on 5th October 2012, the gas prices in California will rise.
It has been said to be a price spike which will soon go down again due to
temporary reduction in supply. According to a woman from a simple family with
simple income, the price rise has started to cost them a lot of money because
of her husband’s job that requires him to drive a certain distance to and back
from work every day. According to the Law of Demand, when the price of a good
goes up, the quantity demanded for the good will decrease. In time, a price
rise of gas like this will definitely decrease the quantity demanded for gas in
California.
Gas as
the main source of energy for vehicles is widely used in every country around
the world. The down side about it is that gas is one of the many limited resources
found in the world. The fact that gas is a limited resource has been causing
the price to rise in this world which has a population that keeps on growing.
The current price of gas is significantly higher than the price compared to ten
years ago. To some people, it has become too costly to drive a car or even us
public transport because an increment in price of gas means increment of bus
fares and taxi fares. At this point, the government plays an important role,
when the price is unaffordable, the government can implement a reasonable price
cap that can satisfy both the suppliers and consumers or they can subsidize a
certain amount from the actual cost. This could help the lower class and enable
most of them to use public transports again.
Despite
the fact that the price keeps on rising, the gas industry is still growing
every single day. The reason for the ever growing gas industry is due to the
inelastic demand. This shows that the percentage change in the quantity
demanded is less than the percentage change in price. Gas is still considered
as a basic need, when the price increases it is not logical for people to stop
using vehicles because they have spent the money on it and there is no cheaper
way to travel the distance required with the use of gas. This causes a
substitution to occur people started looking for alternative energy for
vehicles. The use hybrid cars are getting more and more common in the recent
years.
Hybrid
cars use a mix of two sources to provide energy, as an example the Honda
Insight which uses electric and gas was invented to lower the consumption of
gas, this makes travelling more cost and fuel efficient. This substitution
effect has directly decreased the demand of gas. The factors that influence the
elasticity of demand of gas are the closeness of substitutes, the time elapsed
since the price change and the proportion of income spent on the good. The
degree of substitutability depends on how narrowly we define a good. Evidently,
a substitute for gas is available and considered quite affordable for people
with normal income. This explains the increasing usage of hybrid cars around
the world. The longer the time elapsed since a price change, the more elastic
is the demand. When the price of gas has just been raised, there will be no
significant changes in a short period. Gradually, as the stability of other
source of energy for vehicles increase, more and more people will stop using
gas thus, decreasing the demand. The greater the proportion of income spent on
a good, the more elastic is the demand for it. Since the proportion of income
spent on gas is increasing, many people are trying to find a way out.
In
response to the price rise of gas, people are also encouraging the practise of
carpooling while others try travel by bicycle more for a reasonable amount of
distance. For a group travelling in the same car to the same destination can
reduce the usage of gas by a significant amount. Based on the news on
California price rise, it has been reported that there are gas stations outside
the state that are selling gas at a much lower rate. Logically, consumers who
are not too far away will attempt to purchase gas from there increasing the
quantity demanded for the particular gas station. Again, this can be related to
the Law of Demand, when the quantity demanded increases, the price will
eventually increase. Furthermore, the news has also reported that some of the
gas stations have shut down after running out of gas. They have chosen to not
to take the risk of buying gas at soaring prices knowing that the price rise is
most probably temporary. This is to prevent having overpriced gas when the
price of gas has dropped, if that happens the gas station would be forced to
sell the gas at a price lower than the price they purchased it for, this would
mean giving a consumer surplus.
The
price spike of gas such as this in California would have a bad impact on the
gas industry as well as the government. In order to prevent such occurrence in
the future, the government should further investigate the supplier of gas in
California. As an example, the government should review the production
efficiency of the refineries in California making sure they are not paying more
salary necessary to produce the specified amount of gas. For a refinery, it is
important to make sure the staffs are not misallocated, staffs hired are
supposedly carrying out the duty they are good at and not causing inefficiency.
-Wayne Choo
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