Thursday, April 24, 2008

Why are Gas Prices Rising?


$4 Gas is all the talk and everyone wants to know why. How much gas are consumers demanding? The answer is the top graph (recall quantity demanded equals quantity supplied). Are they responding to changes in price? The answer is comparing the top to the bottom graph. Why are they not responding to rising prices by decreasing their demand (much)? See here. Download the data for the graph here.

5 comments:

Bryce said...

Interesting. In the linked 'Percent of Income' graph, what caused the steep decline in the mid 1930s? That's still smack dab in the middle of the depression and before any WWII efforts, right?

Justin M Ross said...

The cause of the steep ascent in the middle of the 1930's was the fall in income during the great depression. The price of gas was largely unchanged during this period. See http://bp3.blogger.com/_d5lUGK6AlII/R-llVuyuhQI/AAAAAAAAAA4/cfDIRyYg_pk/s1600-h/gasprices.jpg
for a longer extension horizon of gas prices.
All the best.

Justin M Ross said...

P.S. You may have to "triple-click" the link to get the entire copy-paste to work in getting to the website.

Bryce said...

No I get that, but there is a steep descent immediately after the ascent. Starting in 1935 or so, the % income goes down sharply (from 48% to 35%). I wouldn't have expected the sharp decrease until WWII in '41. It's not a big deal. Just curious...

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