Theprice of petrol has been going through a swing from a high price of 103.
4p in2007 to 85.4p in 2008, (Source: RAC Foundation) despite of rise in the use ofpetrol and petroleum products it has seen some rise and fall but the pricesseems again to be rising to be 118p in 2017.Thebelow table summarizes the supply and demand of petrol in UK for the past 10years.Theabove chart indicates that the demand of petrol is on a decreasing trend but it’sinelastic as its decreasing at a very slow rate with an average yearly decreaseof 0.8% , the supply is also decreasing and its decreasing faster than thedemand, and the prices are clearly moving according to the supply demand theorywhich is explained below in figure 1, when the price of petrol is decreasedthere is almost nil or no change in the demand as this is an inelastic goodwith no substitute goods, however as the people go for alternative goods hencethe demand is at a decline inspite of decrease in price of petrol.Incase of increase in price, the supply increase from S1 to S2 and the demand isslightly been decreased, which again proves that the demand being inelastic forthe prices in the short run as seen in figure 2 below.The increase in petrol price willimpact the demand of diesel in the long run, as can be seen from figure 3.
Onrise of petrol prices, the consumers will start taking public transport hence requiringa government spending on the public transport. The increase in price is not indirect conformance with the demand of petrol, as the price of petrol increasesprom P1 to P2 the quantity demanded is slightly increased from Q1 to Q2similarly on increase from P2 to P3 the quantity of diesel is increased from Q2to Q3. So a greater increase in price has a lower impact on increase in demandof diesel in comparison to petro prices.Similarlyin case of petrol run cars the increase in price of petrol will effect indecrease in demand for petrol run car as the people will go in search foralternatives and public transports, The world on the whole has been driving more miles but thesevehicles are definitely not using more oil due to the tremendous increase in fuelefficiency.Petrol and the Cars are complementary goods, which impliesthat if car is purchased the petrol will be needed to run it so if there is anincrease in price of petrol prices there will an almost equivalent decrease indemand of cars. Thedemand of cars will also be dependent upon two conditions:1.
Thecars are being modified constantly and the fuel consumption is on decrease whichis decreased from consumption of 8 liters per 100km in 2000 to 5.4 liters per100 km in 2016. (DVLA Database)2.
Theexistence of alternatives in the form of public transport and electric carsComparisonof Priceelasticity of demand for petrol in the short run and Long Run The price elasticity of demand in shortrun is going to be inelastic, since petrol is a product with no substitute, soin short run as the price of petrol will increase its demand is not going todecrease in short run, which can also be seen by figure 5In figure 5 we can see that the price ofpetrol which was P1 increased to P2 and the quantity demand being inelastic isincreased from Q1 to Q2 in short run. In the long run,demand for petrol is more price elastic. In long run the consumers will tend tosearch for better alternatives and substitutes of petrol run vehicles in a hopeto save money. In long run the demand of petrol will decrease on increase inprice.As can be seen in figure 6 the on anincrease in price of petrol from P1 to P2 the quantity demanded for the petrolis decreased from Q1 to Q2 in the long run as consumers tends to search foralternatives such as hydrogen run vehicles, electric vehicles etc.
The increase in price ofthe petrol has a positive impact on the revenue , the revenue is directlyrelated to price of petrol and when the price of petrol decreases the revenueis decreased and in case of increase in price of petrol increases the revenue.Assessing valueflexibility from changes in absolute income is known as utilization strategywhich measures the value of versatility of the value. In figure 7 it can be seen than anincrease inn price of petrol is directly related to revenue keeping somefactors to be constant such as economic and political stability in gulf region.