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Econ 545 Project 1 Essay

3096 words - 13 pages

Deandra Romanoff
ECON 545
May 25th, 2014

It is indeed very lucrative for potential owners to purchase gas stations in our current economic condition where gas prices are at sky high, especially in places where public transportation is scarce. On average, the whole United States have faced an increased in gas prices nearly 5 cents from March 21st, 2014 to April 4th, 2014 (Reuters, 2014). According to Reuters, Lundberg survey has shown that this increase in gas prices was caused by an increase in demand. In fact, the United States has been experiencing gas prices increasing since early February this year after gas prices saw a price fall in late 2013 (Reuters, 2014). Despite of the fact ...view middle of the document...

Besides that, James also reported that bus and train riders have been increasing since the gas prices started hitting record high (2013). Sharon Bernstein of Reuters (2014) also reported that this effort was made to tackle the traffic congestion that has been haunting Los Angeles area for decades. This effort in increasing public transportation is not only visible in Los Angeles area, but throughout the whole United States because this effort is not only to combat the increasing fuel price, but it is also for the economy recovery and lower pollution. If the number of people riding public transportation or bicycle continues to increase in the future as a result of the increasing gas price, cousin Edgar must understand that there could be a shift in the elasticity of demand in Los Angeles area from being inelastic to elastic, which in turns would cause gas quantity demanded to fall steeply when there is an increase in price.
Another demand factor that would brings effect to cousin Edgar's optimism would be the increasing demand for electric cars, hybrid cars, and gas friendly cars. According to Bill Vlasic of New York Times (2012), Jesse Toprak, an analyst for TrueCar.com, said that because of the wide range of high fuel efficiency cars in the market and the soaring gas price, it becomes harder for customers to ignore fuel efficiency cars when making decision on what kind of vehicles they are going to purchase. In fact, he further added that the demand for smaller cars and better fuel efficiency cars has increased in recent years. According to The Freedonia Group, a Cleveland-based research firm, demand for hybrid-electric vehicles or also known as HEVs would hit to approximately 4.3 million units by 2015, and would double by year 2020 (as found in IndustryWeek.com, 2006). If the consumers continue to prefer high fuel efficient cars over larger cars in the next few following years or decades, the demand and consumption for gas would also be likely to fall as well. Because vehicles are complementary goods for gas, the higher demand for high efficient cars would cause demand and gas consumption to fall, assuming other things are the same. If people expects that gas prices will continue to rise, there will be more consumers who would seek more gas efficient cars in the future, and thus, would affect Edgar's business in terms of his profit making opportunity. Understanding the shift in the elasticity of demand from being inelastic to elastic would allow Edgar to better prepare for the upcoming challenges that he might face from operating gas stations, which he could use it to predict quantity demanded for a particular price point.
Because of the availability of substitute products (public transportation) and more selection of high fuel efficient cars, people's preference would change as well over time. When people starts realizing that they could save money by switching to fuel efficient cars or by riding public transportation, they would no...

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