The demand curve slopes downwards – New Zealand petrol edition
Posted February 25, 2008on:
Stuff mentions a survey done by Research New Zealand on petrol prices and household consumption of petrol. In the survey they found a number of results that seem to follow the basic idea of a demand curve.
From the article the results were:
- 32% of people said they consumed less fuel since the price rose (I am assuming that the remaining 68% would consume the same amount, not more 😉 )
- Half of consumers said they would consume less fuel if the price went over $2 a litre
- More woman are driving less than men (35% to 29%)
- 70% of those that earn over $70k have not change petrol consumption
- If petrol crossed $2, 64% of those earning under $40k would consume less petrol compared to 49% of those that earn over $70k.
It is entirely possible that these facts were cherry-picked by the NZPA article, however lets try to understand them.
Number one simply tells us that the demand curve slopes downward over the spectrum of prices we have already experienced. In other words – in the price range we have faced the quantity demanded has fallen as prices have risen. Awesome.
People are stating that they would consume even less if the price went higher. Of course we can’t completely trust people to do what they say, so we can’t state for certainty that the demand curve for petrol will continue to slope downwards up to $2. However, this at least gives us a feeling that it might.
In the third point it states that women are more responsive to the price than men. Well on average, female income is below male income, implying that they are likely to have more income elastic demand for goods – as petrol is a normal good, and accounts for a large proportion of total spending in some cases, then a discrepancy between male and female consumption makes sense. Also, as a greater proportion of women are secondary earners, at the margin we are likely to see women value fuel consumption (as a means of getting to work and receiving a wage) at a lower rate than men relative to other goods.
Putting these together, we are saying that both the income and substitution effects imply that women should be more responsive to a change in the price of petrol than men – and that is what we have.
The fourth point tells us that people who earn a lot of money are slightly less likely to cut back on driving, while the fifth point states that respondents answer survey questions in a way that would make this gap widen.
This is an interesting result. We might expect the rich to cut consumption less, as the income effect would be smaller (as petrol takes up a smaller amount of their budget) and, if someone on a higher income received the same value from things as someone on a lower income then there would be a lower opportunity cost associated with keeping the level of petrol consumption constant (as people have diminishing marginal utility).
However, if the petrol is used to go to work, and most people on a higher income get higher wages, then the wage sacrifice associated with cutting petrol consumption would be greater – the overall utility sacrifice would be ambiguous. Furthermore, as petrol is a normal good consumption will increase in income – some of this consumption may be discretionary rather than necessary – such as going for a sunday drive. Discretionary fuel consumption is likely to react to increases in petrol prices – which is why 30% of those with incomes over $70k did actually cut their petrol consumption (only slightly below the 32% cut for the whole survey).
Overall, this survey seems to support some basic economic proposition which is good. I am sure I minced this post somewhere along the line, I don’t have too much time to write at the moment – feel free to correct me in the comments.