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Petroleum Pricing - Essay Example
Elasticity in simple terms is defined as the change in one variable due to the change in another. Since, when we operate in a system it is not unusual that things affect one another. Therefore, in economics we see that simple demand and supply of products are affected by prices, change in prices of other goods etc.
Below we will analyze this phenomenon in light of both price elasticity of demand and also the cross price elasticity of demand.
Price elasticity of demand is the measure of percentage change in prices on the percentage change in quantity demanded of a certain product. 1 Price Elasticity of demand is a negative ratio as there is a negative relation between price and quantity demanded. In simple terms, common sense suggests that if price of certain product increases then people will tend to buy less of that product.
One of the determinants of the price elasticity of demand is the number and the closeness of substitute products; analyzing the substitutes available for petrol, we have compressed natural gas, bio fuels which include hydrogen gas, liquefied natural gas (LNG) and liquefied petroleum gas (LPG)2 etc. All these can be used for transportation. But the problem that so arises is that these fuels need to be compatible with the cars that run on the road and the particular country's government and other regulations should also be supporting the alternative forms of transport. ...