Products, Services And Prices In The Free Market Economy
Introduction
Gasoline companies such as ExxonMobile have been fluctuating drastically for many years. Gasoline has a tendency to increase in price seemingly overnight. Consumers do not have many choices when buying gasoline. Usually, consumers make choices to purchase a product based on price as well as other factors such as quality and need. “The responsiveness (or sensitivity) of consumers to a price change is measured by a product's price elasticity of demand.” (McConnell & Brue, 2004, p.20). The need factor of gasoline is more of a necessity than that of a luxury. Another factor to consider is the product durability of gasoline. “Studies show that “short run” demand for gasoline is more inelastic than is “long run” demand. In the short run, people are “stuck” with their present cars and trucks, but with the rising gasoline, prices they eventually replace them with smaller, more fuel-efficient vehicles” (McConnell & Brue, 2004, p. 34). One last consideration with gasoline purchase is the income elasticity of demand. Even though people do not seem to purchase as much gasoline if they have lower incomes, gasoline is inelastic for the reason that if the price of gasoline fluctuates people will still purchase it.
Price Elasticity of Demand
Price Elasticity of demand refers to a consumers’ reactivity to a product’s change in price. An elastic demand indicates that a decrease in the price of a product will result in an increase in revenue. Conversely, an inelastic demand is realized when the reduction in a product's price results in a decrease in revenue (McConnell & Brue, 2004).
One of the main factors that can affect the elasticity of a product is its substitutability. Substitutability refers to a consumer's ability to defer to substitute goods in the event of a price increase. While gasoline is produced by various manufacturers, there are few, if any substitutes for gasoline itself. As a result,...
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