Monday, January 30, 2012

Gas Prices and Car Buying

One of the early topics in Prin. of Microeconomics is about consumer behavior and specifically about how the prices of other goods affect consumer behavior. If prices of other goods do impact the demand for another good, then they are either a substitute or a complement. Here is a New York Times article that has both and fits with the theory of consumer behavior quite well.

First, let's note that gasoline and automobiles are complements - you need gasoline (ignoring diesel and electric) to power your car and thus are used together, which is a complement. As gas prices increase, the demand for gas powered cars decreases. Problem is that most people do not have great alternatives to a gas powered car in the short-run, so they are substituting smaller cars (using less gasoline) for larger cars, exactly what we see in the NY Times article linked above.

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