Rising gas prices Research Paper Example | Topics and Well Written Essays - 750 words

Rising gas prices - Research Paper Example ed April 19, 2012 entitled â€Å"More Gas Price Cuts Likely Soon†, gas prices appear to have peaked and are likely to head lower in the coming weeks, supported by gasoline futures dropping four days in a arrow and a slight decline in pump prices in the past couple of weeks. Overall, the increase in gas prices may decrease consumer spending and gross domestic production but through technology, we may revert to substitutes that lessen our gas consumption. The effect of gas prices, from fundamental microeconomic analysis follows assumptions on the demand for gas, both in the short run and in the long run. One of the assumptions about the demand for gas is that it may be price elastic in the long run but may be very inelastic in the short run, as people take time to for change their consumption habits (Pindyck and Rubinfeld 2005). When gas prices increase, in the short run, quantity demanded will fall only gradually as motorists and drivers may begin to use their vehicles less. In addition to this, the demand for gas is very much linked to the usage of cars and transportation, and it is not so easy to simply change from driving your car to work to using a bicycle. This is not to mention that almost all transport vehicles including trains and ships use some form of petroleum and gas, hence either the producer of a good or service or the customer will most likely take in the increase of gas prices. In essence, this leads to either lower production to reduce costs of firms, or lower consumer spending, to save up money for gas (Pindyck and Rubinfeld 2005). While in the short run, an increase in the price of gasoline has only a small effect in the quantity of gasoline demanded, in the long run, various changes in the transportation may lead to less demand for gas, thus making its demand elastic. Technology in general may shift to more fuel-efficient vehicles, thus consumer spending comes back to its natural level. Historically, this assumption has been supported by the