The economic concept that is being displayed in this article is (Elasticity of Demand). Elasticity of demand is the responsiveness of demand to a change in the price of a good or service. To determine whether this is a inelastic or elastic demand we need to analyse the characteristics of each type of demand.
Elastic good or service will tend to have a large variety of substitutes meaning that when the price of increases the consumer has many substitutes to change to. Most of the time elastic goods or services are luxury good and a large proportion of the consumer’s income is spend on it. When measuring the elasticity of demand the equation that is utilised is: % change in quantity demanded divided by % change in price. Hence when the coefficient is greater than one then we can identify it is an elastic good.
On the AD/AS curve this could be graphed as a very flat demand curve becoming flatter the more elastic it gets up to the point where the demand curve is horizontal which indicates perfectly elastic demand. Another characteristic of elastic demand is that it is not a habit forming good or service which means that the consumer will not get addicted to it or be in need of it allowing them to respond comprehensively to a change in price.
A further concept of PED is price discrimination, which is the “microeconomic pricing strategy where the consumers are being charged different prices for the same god or service.” Businesses are able to discriminate inelastic goods and services as they know for sure that the consumers will be obligated to continue purchasing it. This discrimination often takes place on different days of the week (e.g petrol, airfares) or different times of the day (e.g Bus fares). Looking at petrol we can see that the prices are at their lowest on Tuesday and Saturday. As its regional fuel tax, different regions will have deferred tax rates which can also be considered price discrimination.
Graph 1:
This graph gives us a scenario in which relatively flat demand curve represents an elastic demand change. There is a relatively small increase in prices (20%), which resulted in a large decrease (30%) in quantity demanded. This would have occured due to a high number of substitutes to switch to. The proportionate change in quantity demanded is greater than the proportionate change in price, hence portraying how responsive elastic demand is.
Inelastic goods or services are tend to have a small to no number of substitutes in a monopolistic market and are necessities. Since it is a necessity consumers will have no choice but to continue purchasing. A small proportion of the consumer’s income is spent on inelastic goods or services and when being calculated with the formula above, the coefficient will be less than one resulting in a very steep demand curve up to the point where it is vertical meaning it is perfectly inelastic. Another characteristic of inelastic demand is that it is very habit forming, meaning that the consumer of these goods and services will often get addicted to them eg. Alcohol, Drugs etc. Although petrol is not addicting, it is still habit forming as we rely on it to drive to work, school or elsewhere and without it we wouldn’t be able to continue doing so. In addition to this the government will in most cases enforce a tax on inelastic products as the majority of the tax will fall down on the consumer rather than the producer.
Graph 2:
This graph indicates that the demand is inelastic. This can be seen through its steep gradient and how a large increase in price (30%), resulted in almost no change in demand (10%). This means that there was no choice but to continue purchasing this good or service. The proportionate change in price is larger than the proportionate change in quantity demand which is due to the unresponsive nature of inelastic demand.
Graph 3:
MR= Marginal Revenue
AR= Average Revenue
Analysis:
In this case the product is fuel for motor vehicles that leaves consumers unsatisfied with petrol stations across New Zealand. The prices of petrol have increased by 5% in the year ended march 2018 according to Stats Govt NZ and people have been seeking ways to reduce their petrol consumption ever since. This indicates that the elevated prices are clearly causing the demand of the consumers to diminish. It is likely that the government will be enforcing the tax of petrol as it is considered a inelastic good and the majority of the the the tax will be passed on to the consumer since they are more or less forced to continue purchasing the product. When the prices of crude oil elevate, the petrol companies tend to increase the prices very quickly. They are able to do so as a result of their product (petrol) being inelastic forcing the consumer to buy it. This rapid increase in petrol prices is so that a maximum amount of profit can be made on the petrol companies side. This is emphasised in the scenario where the petrol prices need to be decreased to gain an advantage over a competing petrol station. This change will take place in very small steps as the firm is trying to still get the most money out of it as possible rather than instantly lowering their prices to a certain amount and missing out on the money they could have made if slowly dropping the prices.
The two major events that resulted in the increase of fuel prices are:
The increase in GST to 15% on the 1st of October 2010 added 4 cents to the original prices of fuel.
The introduction of regional fuel tax in Auckland on the 1st of July 2018 which caused the price of petrol and diesel to elevate by 10 cents per litre.
In order to get a realistic understanding of the change of the fuel prices we will have to look at the changes that have been occuring.
2019-3-31-1554006983
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