Impact of Rise in Price of Gasoline Research Paper - 6

Impact of Rise in Price of Gasoline - Research Paper Example Gasoline is the complement of automobiles. The decrease in the supply of gasoline is likely to push its price up. Hike in price of compliment tends to decrease the demand for the good. In this case, the demand for both luxury cars and economy cars will decrease. However, due to the different nature of luxury and economy cars, their demand will decrease in different proportions in response to change in the price of gasoline. Luxury cars are likely to consume more gasoline hence their demand likely to be more responsive to increase in the price of gasoline relative to economy cars that are fuel-efficient and take a relatively little portion of consumption. Demand for luxury cars will, thus, decrease more than that of economy cars. These impacts are shown in the following figures. The horizontal axis shows the demand and supply quantity of luxury cars and the y-axis represents their price. Initial equilibrium lies at point E1 where demand curve D1intersects supply curve S. Due to increasing in price of gasoline demand curve shifts leftward i-e D2. The new equilibrium is E2, where equilibrium quantity has decreased from Q1 to Q2 and equilibrium price, has fallen from P1 to P2. In the case of economy cars, the same phenomena would repeat. The demand curve for the economy cars will shift to the left representing decreased demand for economy cars due to a rise in the price of gasoline. However, the extent of decrement in the demand for economy cars is likely to be lesser relative to that of luxury cars. As shown in the diagram below, X-axis shows the quantity demanded and supplied of economy cars and Y-axis shows their corresponding price. Due to the rise in the price of gasoline demand curve D1 shifts leftward and new demand curve D2 appears. Initial equilibrium lies at point E1 where equilibrium quantity is Q1 and the equilibrium price is P1. New demand curve D2 intersects supply curve S at point E2.  At new equilibrium, E2 equilibrium quantity is Q2 and the equilibrium price is P2.