The Increase in the Price of Gasoline - Assignment Example

? Substitution and income effects Grade (25th, Oct. Substitution and income effects Whenever, the price of acommodity utilized by a consumer changes, other subsequent changes occur. These changes affect the income of the consumer and his/her ability to purchase other commodities (McEachern, 2012). Thus, the change in the price of one commodity triggers a change in the income available for the consumer to utilize in purchasing other commodities that satisfy his/her need. This being the case, it is vital for the consumer to apply other alternatives, which could include using substitute products or reducing the budget for the other commodities. Therefore, an increase in the price of gasoline has various effects. The owner of the vehicle can opt to take several measures in order to remain at the same level of satisfaction (Hall & Lieberman, 2008). Considering that it is only the price of gasoline that have changed, yet the income of the consumer remains constant, the following decisions will have different income and substitution effects: You drove less and purchased less gasoline When a consumer decides to drive less and purchase less gasoline, he/she will be able to save some income. The income saved from the reduction in the gasoline purchased can make up for the budget reduction that would have occurred as a result of increased gasoline prices (Landsburg, 2011). However, the satisfaction obtained by the consumer is likely to change. This is because, the consumer can no longer travel to far off distances where he/she used to go before. This could limit the satisfaction he obtains from the travel and adventure (Hall & Lieberman, 2008). Additionally, the reduction in the quantity of gasoline purchased limits the extent to which the basket of the consumer can be filled, since some cheaper commodities that make up his/her basket could be found some distance away. Therefore, although reducing the quantity of gasoline purchased and the consequent distance travelled can maintain the consumers purchasing power, it is likely to reduce his/her satisfaction (McEachern, 2012). You ate out less often The effects of reducing what the customer eats, is not any different. Eating out less often has the substitution effect of conserving some resources that could have been used for food, to make up for the gap created by the increased gasoline price. This is meant to maintain the customer at the same level of consumption for gasoline units, despite the change in its prices (). However, even though such a move can keep the consumer at the same levels of gasoline consumption, he/she has already lost out in the quantity of food and drinks consumed. This has the effect of reducing the satisfaction of the customer, derived from eating several times in a day (Landsburg, 2011). In making such a decision, the preference and utility derived by the consumer from eating certain units of foodstuff in a day will play a greater role (Hall & Lieberman, 2008). The consumer will make his/her shopping basket based on the preference and the utility he/she derives from them. Thus, although reducing the quantity of foodstuff consumed can maintain the purchasing power of the consumer, his/her situation could be worse off in terms of satisfaction derived from foodstuff consumption (McEachern, 2012). You spent less to maintain your automobile Where the consumer decides to reduce the money spent in maintaining the automobile to mitigate the effects of increased fuel prices, the decision can maintain his purchasing power in the short run. However, this can be detrimental in the long run, since the automobile might end up breaking down, causing more resources to be used in its repair, than would have been used in its maintenance (Hall & Lieberman, 2008). Therefore, reducing the resources used in automobile maintenance can help the consumer remain at the same consumption level as before. However, this is not sustainable since lack of maintenance worsens the condition of the automobile. This is likely to reduce the satisfaction of the consumer derived from having the automobile in good condition, since he/she might be limited to use it (Landsburg, 2011). You took public transportation more often Using public transport is yet another alternative that a consumer can apply, after the prices of gasoline hike. This can help the consumer to maintain his/her purchasing power, consequently retaining his/her shopping basket (McEachern, 2012). This is because; the money that would have been used to buy gasoline at a higher price will be saved. This can leave the consumer at the same level of satisfaction or make him better off, if the cost of public transport is much less than that of buying gasoline. However, the inconveniencies associated with the use of public transport will cancel out these benefits. Since the satisfaction that a consumer used to enjoy by driving his/her own car is no longer attained, the utility derived from driving own car will be missing (Hall & Lieberman, 2008). This has the effect of limiting a consumer’s choice, since he/she has to operate within the schedule of public transport and no longer his his/her schedule. You bought a bicycle If a consumer decides to use a bicycle instead of automobile to save on the extra cost, he/she will remain at the same level of consumption, but the satisfaction derived would be reduced (Landsburg, 2011). Using a bicycle would mean that a consumer has to leave home for work many hours earlier and arrive home much later. Additionally, the inconveniencies involved such as the health effects and the energy required to cycle will reduce the utility obtained from using bicycle for transport. Therefore, although the consumer can maintain his shopping basket, he/she will be worse off in terms of the overall satisfaction obtained (McEachern, 2012). You did not take a vacation away from home If a consumer opts to stay home instead of taking a vacation to make up for the extra cost of gasoline prices hike, he/she can manage to maintain the purchasing power and the consequent shopping basket. However, the utility derived from taking a holiday away from home, where an individual can relax and release stress will be missing (Hall & Lieberman, 2008). Therefore, although the customer can manage his/her usual shopping basket, the satisfaction obtained from this choice is not optimal. You bought fewer clothes and made due with more around the home The satisfaction derived from reducing the clothes purchased, to make up for the extra cost resulting from increased gasoline prices will not be optimum (Landsburg, 2011). This is because, although the money saved from clothes buying will help in maintaining the purchasing power of the consumer, it will leave hi/her worse off, in terms of the utility derived from wearing new clothes (McEachern, 2012). References Hall, R. E., & Lieberman, M. (2008). Microeconomics: Principles and applications. Mason, OH: Thomson/South-Western. Landsburg, S. E. (2011). Price theory and applications. Australia: South-Western/Cengage Learning. McEachern, W. A. (2012). Economics: A contemporary introduction. Mason, OH: South-Western Cengage Learning. Read More