Gas Prices Cause Rise in Consumer Spending

This blog article is based on the “Gas Prices Cause Rise in Consumer Spending” article by The Associated Press from The New York Times that was posted on September 28, 2012. The full article can be seen here.

In today’s economy, we are affected by the rising gas prices in everyone’s lives.  Natural gas is not a renewable resource, since there is a fixed amount of it trapped in the Earth. However, many people carry the misconception that there is a very limited amount of natural gas but actually this isn’t true. Gas price can be down a little one month, up the next month, and then it can shoot up highly in a sudden too. All these high costs of gas are actually caused mainly by the demand for natural gas.

The price of gas is widely covered in the news these days. The gas price rise consistently which causes the different spending methods for all consumers each time. Consumers have been spending lesser on their own requirements due to the gas prices rises. People always want more than what we can get and the inability to get certain things is known as scarcity. It is all about the choices of consumers making their decisions to deal with scarcity and how those choices respond to incentives. A hike in gas prices is always a major headache but it can also be a severe problem for many families or consumer budgets. Come what may, consumers are still paying money for gasoline even if the price keeps increasing radically. All of the consumers spending increase higher in order to pay for higher gas prices, which may have forced consumers to cut back elsewhere. In the other hand, some consumers might also give up on driving their own vehicles. Instead, they can also travel along with public transportation or car pooling as it can be a lot cheaper.

Based on the article, consumer spending rose 0.5 percent in August from July due to gas price rises. The basic cause heavy increase in gas prices is an imbalance between the supply of oil and the demand for gas. In today’s time, the prices of gas are somehow much cheaper than the price for oil. Therefore based on the consumer’s point of view, the opportunity cost will be other petroleum’s such as oil since gasoline is cheaper. The opportunity cost of purchasing gasoline is the oil we must forgo because we cannot purchase more of one good without giving up some other goods that provides greater benefits. We demand for something we want it and are able to afford it that is why we are demanding more from it. In this situation, Consumers are demanding for more gas instead of oil. This causes the price of gasoline increases dramatically due to consumers demand. If the demands from consumers are lower, the price of gasoline will also be lower as simple as because nobody wants it.

Today buyer’s demand competes for gasoline instead of supply competing for buyers. When a price rises, other things remain the same and a person’s salary did not increase, causes the income effect. People cannot afford to buy all things previously bought and they need to decrease the quantities demanded of some other goods and services. An example for gas is if the price of gasoline rises, people have to purchase other goods lesser in order to purchase the same amount of gasoline. In the other hand, if the price of gasoline decreases, people have a chance to spend their money on other goods or they can increase the usage of gasoline. In this case, substitution effect can be involved too. If the price of gasoline is too high, consumers have their right to substitute gas with other better fuels or public transportations. Although each good is exclusive, it has to be substitute with other goods that can be used in place.

If the expected future price of gasoline rises and if gasoline can be stored, the opportunity cost of obtaining the gasoline in the future use is lower today than it will be in the future when people expect the price to be higher and eventually people will keep substituting over time. They demand gasoline now before its price increases, so it affects the demand rate now for gasoline increases. Gas price often go up during the summer because more people will be traveling, especially on family vacations and road trips, thus it increases demand. For example, suppose that summer season it’s around the corner, the expected price of the gasoline is to rise, so people stored up some gasoline to avoid the high-priced. So, their demand for gasoline now has increased and their future demand has decreased. Same goes to when the expected future price of gasoline falls in the winter season in the future, the demands for now reduces and eventually increases while winter.

Of course, the populations demand also depends on the size and the age structure of the populations. The larger populations the larger is the demand for all gasoline whereas the smaller the populations that are requiring for the use of gasoline, the lesser demand is required. Consumers’ income influences strongly on demand. As mention in the article, Americans income grew only 0.1 percent but after accounting for inflation and deducting taxes, income actually fell 0.3 percent. When income increases, consumers are able to buy more goods such as gasoline but when income decrease, consumers couldn’t afford much. As when income increase, is when also one can afford to purchase more gasoline to travel with vehicles as a normal goods rather than traveling by public transportations as an inferior goods. 

            Besides demand, gasoline is also example of goods that have inelastic demand. Demand for gasoline is the quantity demanded by buyers doesn't change as much as the price does. Even though some consumers might not purchase that much gasoline when its price is high, but they still require buying it. This is when the quantity demanded doesn't change as much as the price because consumers still require using it. Lastly, proportion of income spent on the good is when other things remaining the same, the greater income spend on good; the more elastic is the demand for it, then again the lesser consumer’s income, the more inelastic is the demand for gasoline. These are all the causes and effects of American consumers spending methods while gas prices rose nearly 50 cents a gallon in July and August.