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Economics

21 February 2016

The Relationship between Gas Prices and the Bicycle Market

The NPR article, As Gas Prices Drop, Hybrid Sales Shift Into Low Gear, by author Sonari Glinton, illustrates the relationship between gas prices and the hybrid car sales. While low gas prices are favorable to the consumer, it isn’t good news for hybrid car dealers. Despite gas prices fluctuating greatly these past six months, car buyers are more likely to purchase SUVs and luxury sedans if gas prices are low at the time of purchase without considering the expected future price of gas. The effect of this is to reduce demand in the hybrid car market; although, if gas prices rose significantly over night, the demand for fuel-efficient and hybrid cars would create a shift to the right in the demand curve.

In this paper, the possible effect of a decrease in the price of gas is analyzed in the market for a substitute good, the bicycle market. When the price of gas decreases, the choice making behavior of consumers is altered. For example, the demand for fuelefficient and hybrid cars decreases, while the demand for less fuel-efficient cars increases. The reason for this is that hybrid cars can be thought of as a kind of substitute good for gasoline. Moreover, if demand for hybrids decrease as a result of a decrease in gas prices, perhaps demand will also decrease in the market for another substitute good, the bicycle market. The reason for this is quite simple. People choose to ride their bike as a mode of transportation if they believe the benefits exceed the cost. Part of the benefit of riding a bike is the savings on fuel. So if gasoline prices fall, the amount of people willing to invest in and ride their bike as their mode of transportation would decrease due to the low cost of filling up their gas tank. The time, energy, and exercise that are included while riding a bike would be considered less beneficial to the consumer compared to the faster mode of transportation, driving, despite the financial cost. In result, this would create a leftward shift in the demand curve for the bicycle market.

With the leftward shift in the demand curve, there will be a change in the equilibrium price of bicycles and equilibrium quantity of bicycles. As shown in Figure 1 below, a decrease in the demand for bicycles is shown by a leftward shift in the demand curve from 𝐷𝑒𝑚𝑎𝑛𝑑1 to 𝐷𝑒𝑚𝑎𝑛𝑑2. In result, this causes equilibrium price to fall from and the equilibrium quantity to fall from . The implications of this result include reduced revenues received by bicycle making firms and companies. Perhaps more importantly, since the causal relationship between exercise and heart disease is undisputed and bicycle use involves exercise, perhaps the decrease in gasoline prices will result higher rates of obesity and America’s number one killer, heart disease.

𝑆𝑢𝑝𝑝𝑙

𝑦

𝐷𝑒𝑚𝑎𝑛𝑑

𝑃

𝑟𝑖𝑐𝑒

𝑀𝑎𝑟𝑘𝑒𝑡

𝑓𝑜𝑟

𝐵𝑖𝑐𝑦𝑐𝑙𝑒𝑠

𝑃

∗

𝑃

∗

Figure 1

Works Cited

Glinton, Sonari. "As Gas Prices Drop, Hybrid Sales Shift Into Low Gear." NPR. NPR, 17 Oct. 2014. Web. 1 Oct. 2015. < http://www.npr.org/2014/10/17/356949485/asgas-prices-drop-hybrid-sales-shift-into-low-gear>

Last Name 1

	Points	Possible	Comments	Criteria
Summary		5	*“illustrates the relationship between gas prices and the hybrid car sales”*	What is the main point of the article? Concise summary of the main issue of the article. The reader should not have to hunt for the main point. This summary should not be more than a quarter of a page. This summary should include a sentence such as, “The article describes rising grape jelly prices caused by drought.”
Analysis		5	*“In this paper, the possible effect of a decrease in the price of gas is analyzed in the market for a substitute good, the bicycle market.”*	What market did you analyze? The reader is clearly informed of the market being analyzed. For example, “In this paper, the possible effect of an increase in the price of jelly is analyzed in the market for peanut butter.” This makes it clear to the reader that you are analyzing the market for peanut butter, not jelly.
		5	“In result, this would create a leftward shift in the demand curve for the bicycle market.”	Which curve(s) shifted and in which direction? The reader is clearly informed whether there is an increase or decrease in demand, supply or both. This can be provided at the beginning of your analysis or nearer the end after you’ve made you supporting argument.
		5	“if demand for hybrids decrease as a result of a decrease in gas prices, perhaps demand will also decrease in the market for another substitute good: the bicycle market.”	Why did the curve shift? The cause of the shift in demand and/or supply for each shift is identified and discussed. For example, is it a change in tastes, income, price of a key input…? Please review Chapter 2 if you struggle with this.
		10	“People choose to ride their bike as a mode of transportation if they believe the benefits exceed the cost. Part of the benefit of riding a bike is the savings on fuel. So if gasoline prices fall, the amount of people willing to invest in and ride their bike as their mode of transportation would decrease due to the low cost of filling up their gas tank…”	Does this shift make sense? A supporting argument for why this determinant causes the shift in demand or supply is provided. For example, “Peanut butter and jelly are often used together. For this reason, they are complement goods. Therefore, when the price of jelly rises we should expect a decrease in the demand for peanut butter.”
		10	“As shown in Figure 1 below, a decrease in the demand for bicycles is shown by a leftward shift in the demand curve from 𝐷𝑒𝑚𝑎𝑛𝑑1 to 𝐷𝑒𝑚𝑎𝑛𝑑2. In result, this causes equilibrium price to fall from and the equilibrium quantity to fall from .”	What are the results of the analysis? Conduct the analysis and give an explanation of the graph and results. For example, “As shown in Figure 1 below, a decrease in the demand for peanut butter is illustrated by a leftward shift in the demand curve. This causes the equilibrium price to fall from P1 to P2 and the equilibrium quantity to fall from Q1 to Q2.” Remember, “Left is less, right is more”.
		10	“The implications of this result include reduced revenues will be received by bicycle making firms and companies. Perhaps more importantly, …”	What are the implications of the results? Tell us what these results mean for households, firms, the government, etc. For example, “Lower equilibrium prices and quantities of peanut butter will result in reduced revenues for peanut butter producing firms. These reduced revenues may contribute to reduced employment in this industry.”
Execution		5	See work cited.	The article is cited properly in the Works Cited page.
		5		Few, if any, grammar or spelling errors. The paper is properly labeled including the header. To change the header click Insert  Header  Edit Header.
		20	See graph.	Your analysis is illustrated with a graph. The graph is neat and properly labeled, including the market, quantity, old and new equilibrium, changes to the supply or demand curves, etc.
		20		Writing is organized, concise and articulate. The minimum word count is 400. The paper is on time, stapled and uses the provided template.
			Total Score:

***PLAGIARISM WILL RESULT IN AN “F” ON THE ASSIGNMENT***