Falling gas prices have consumers smilingAlex Severn

Review

•How income affects change•How price changes affect consumption choices

▫Substitution Effect – change in the relative prices▫Income Effect – change in purchasing power

Article

•Average price of gas dropped below $2.03▫Many stations sold at $1.99▫Some stations sold at $1.92

•AAA predicts the average price will decrease to $1.90 by the end of the year

•Biggest break since early 2009

How are consumers behaving?

•AAA conducted a survey▫32 percent are paying bills▫27 percent are putting money in savings account▫13 percent are eating out ▫11 percent went shopping ▫11 percent traveled▫29 percent said, “they didn’t feel as if they had more money”

•Note the survey allowed the respondents to choose more than one option

So how are consumers behaving?•Example: Jenna Burton of Orange

County▫Now spends $40 to fill her vehicle

rather than $60▫Placing the savings into a business-

expense fund which allowed her to replace cell phone

▫Assume: Jenna’s Budget is $360 A cell phone cost $300 When spending $60 on gas the price

was $2.60 and currently she is paying $1.99

Quantity of Gas (Gallons)

23.1

138.5

180.9

21.2

AB

1

20.1

Quantity of Cell Phones

Quantity of Gas (Gallons)

Quantity of Cell Phones

23.1

138.5

180.9

1 21.2

A’

A BSubstitution Effect

Substitution Effect

Income Effect

Income Effect

Total Effect

20.1

Note: Gas is an inferior good for Jenna

Total Effect

Many consumers are happier, BUT!

•According to the article, “one reason prices are low is because of a slowing Chinese economy.”

•This slowdown causes demand to decrease – shift in Demand curve inward for other goods▫Cars ▫Other consumer goods

•Decrease in demand hurts economies in long run

Conclusion

•Floridians are feeling richer because of the change in gas prices

•We can demonstrate this effect with the substitution and income effects

•Questions?

Works Cited

•Jacobson, Susan. 2015. “Falling gas prices have consumers smiling: At less than $2 a gallon, people are applying their savings elsewhere.” Orlando Sentinel, September 29. http://www.orlandosentinel.com/business/os-gas-prices-florida-consumer-spending-20150928-story.html.