Read through the following extract and reflect on the questions asked:
The price elasticity of demand is defined as “the percentage change in the quantity demanded divided by the corresponding percentage change in its price” (Begg 2000). The application of this theory to the retail fuel industry proposes that an increase in the fuel price leads to a reduction in the demand for fuel. Considerable research has attempted to identify factors that influence fuel demand, as well as to provide insights into the sensitivity of consumer demand to fuel prices changes (Espey 1996). Fuel price has been identified as one of the key variables affecting the demand for fuel (Graham & Glaister 2002). However, South African consumers have indicated a relatively inelastic short-term demand for fuel because of a lack of alternative transport systems. It could be expected, however, that higher levels of elasticity could be achieved through a combination of a reduction in the use of vehicles, lift clubs, the use of public transport, better driving techniques, more regular servicing of vehicles and a shift to more fuel-efficient vehicles in the longer term (TDM Encyclopedia 2005a; 2005b). In this regard, Graham and Glaister (2002) also highlight the impact of a better infrastructure and a functional public transport system on fuel demand.
Graham and Glaister (2002) performed an extensive international survey on the response of motorists to fuel price changes that indicated a fairly narrow range for short-term price elasticity and a bigger range for long-term price elasticity. This research concluded that, in general, international short-term price elasticity ranged between –0,10 and –0,3 and long-term price elasticity between –0,6 and –0,8. The price elasticity of gasoline in the USA, for instance, was estimated to be –0,15 in the short run and –0,6 in the long run (Bailly 1999). In South Africa, the Bureau for Economic Research (2003) estimated that the short- and long-term price elasticity of demand for petrol ranged between –0,21 and –0,51, respectively. All of these results indicate short-term inelastic conditions that become more responsive over time.
In this regard, short-term inelasticity with respect to petrol in South Africa is illustrated by a 17% increase in the petrol price in 2005, which only resulted in a 0,2% drop in sales …
Source: Sartorius, K., Eitzen, C & Hart, J. 2007. An examination of the variables influencing the fuel retail industry. Retrieved from https://actacommercii.co.za/index.php/acta/article/download/33/32
Questions for reflection
- Are South African consumers sensitive or insensitive to a change in the price of fuel?
- What do South African consumers do if the price of fuel increases?
- Why is it not possible for South African consumers to adjust their use of fuel in the short run?
- What happens to the revenue of fuel supplier if the price of fuel increases and what happens to their revenue if the price of fuel decreases?