Demand and supply and the market of hybrid cars due to the increase price of petrol

Article 1

(http://malaysia-today.net/index.php?option=com_content&view=article&id=30301:petrol-price-expected-to-increase-by-10sen&catid=19:newscommentaries&Itemid=100131)

The article stated that RON95 current price is RM1.80 per litre, RON97 current price is RM2.05 per litre and diesel is RM1.70 per litre. In the Fast Motoring article the 1Malaysia government is expected to adjust the fuel price of RON95 to RM1.90 and RM1.80 for diesel along with the new fuel price mechanism which will be revealed in the mid-March. The price of RON97 will also be increased but there is no decision yet with the government. The government believed that increase of 10sen is acceptable to all automotive users.

Petrol is a complementary good, one that is used with another good such as cars. An easiest way to understand complementary good is that if the price of the petrol is decreased, the demand of an SUV car will increase. SUV cars have high consumption on petrol. Even though SUV cars petrol consumption is higher than normal cars the price of petrol is still lower where consumers can afford to pay for it and also afford a SUV car. In economics we define goods as substitute goods as if the increase in the price price of a good increases and the demand of another good which could replace it increases which is cheaper.

 The total effect of a price change is actually combined of two different effects, the income effect and substitution effect. Income effect is when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases. An example of income effect is that if the price of petrol increases, everyone’s income is still the same. People will feel poorer and couldn’t afford the new price of the petrol. This would make them change to scooters and motorcycle which consume less petrol. Next is substitution effect, an example for its explanation is that the prices of the petrol increases but the salary of automotive users still maintains the same, so they will find a substitute good to replace it. They will substitute to a good that will allow them to consume as little petrol as possible.  An example is that the demand of bicycles, motorcycles and hybrid cars will increase because petrol is not needed much.

As above, cars and petrol are complements. A Toyota Prius which is a hybrid car does not fall into the oil complement category because it uses another type of energy source with is electrical motor and it only uses a small amount of petrol. They will also other fuel efficient vehicles that could substitute. Hybrid car are gasoline engine run car combined with the power of electric motor. Petrol prices increases and the demand for these categories of cars increases. SUV’s are fully petrol consume cars, SUV’s and hybrids are substitutes. When one is in high demand the other products demand usually decreases.

  Now these are the definition of the law of demand and the law of supply. The law of demand is that the price and quantity demanded move in opposite directions. A decrease in price will lead to an increase in quantity demanded. An increase in price causes quantity demanded to fall. When this relationship between price and quantity demanded is graphed, it is called the demand curve. There are 6 main factors that would change the demand. The 6 factors are the prices of related goods, expected further price, Income, expected future income and credit, population and preference. The law of supply is the direct relationship between supply price and the quantity supplied, assuming ceteris paribus factors are held constant. This economic principle indicates that an increase in the price of a commodity results in an increase in the quantity of the commodity that sellers are willing and able to sell in a given period of time, if other factors are held constant. The law of supply is an important principle in the study of economics. There is 6 factors that can change the supply of a good. The 6 factors are the prices of factors of production, the prices of related good produced, expected future price, the number of suppliers, technology and the state of nature.

In diagram 1 as price of petrol increases, the demand of the hybrid car in the market increases as well. When demand increases the demand curve in diagram 1 will move upwards from A to B. In diagram 2 it shows that if the price of petrol decreases, the demand of hybrid car will also decrease. It is because people could afford to pay for the petrol and buy a fully petroleum car to use. There was no increase in supply because it is harder for the producers of the hybrid car to supply more because the supply curve is very inelastic. So as the price of petrol decreases so does the demand of hybrid cars to sustain normal cars.

In my opinion and studies, there are lots of substitute goods such as motorcycle and hybrid cars, but not all Malaysian will choose a neither motorcycle nor hybrid cars. When the price of fuel increases, there will be less driving and people will start to go for public transport such as buses, LRT, monorail and etc. Not all Malaysian could afford to buy a hybrid car. Majority will go for public transport but middle class family which could afford a hybrid car would obviously go for a hybrid car. Hybrid cars are still considered as luxuries cars and not low cost cars. It is because hybrid cars are still expensive and production is not as much as fully petroleum cars. For example Toyota have PRIUS and Honda have INSIGHT and CIVIC. Both brand of hybrid cars are not cheap as the cheapest 1 is Honda Insight and it cost a RM98,000 and the maintenance is very high as the technology is still new in the market.