Q: If people are driving less, why do gas prices keep rising?His explanation regarding speculation is correct as far as one possibility goes, but there is an error in the last paragraph, and 3 other possible supply and demand explanations for why the relationship (price going up and quantity going down) is being observed.
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
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Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit — and may cut back even more drastically as gas gets more expensive — it may be some time before prices start responding to lower demand.
Identify the error and the 3 possibilities. The answer is in the comments.
4 comments:
Error: People cutting back in gas consumption BECAUSE of higher gas prices will not eventually cause a fall in gas prices.
Explanation 1:
Negative supply shocks would cause price to increase and the quantity demanded to fall.
Explanation 2:
Gas has uses other than for drivers. If demand for the alternative uses of gas increases (causing price to increase), total gas consumption would increase even though the amount of gasoline used by drivers fell. The article is not clear if gas consumption is based on drivers or all uses of gas.
Explanation 3:
The worldwide demand for gasoline has increased, causing prices to rise. As a result, Americans are using less, but the world is using more.
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