The
price of petrol has been going through a swing from a high price of 103.4p in
2007 to 85.4p in 2008, (Source: RAC Foundation) despite of rise in the use of
petrol and petroleum products it has seen some rise and fall but the prices
seems again to be rising to be 118p in 2017.

The
below table summarizes the supply and demand of petrol in UK for the past 10
years.

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The
above chart indicates that the demand of petrol is on a decreasing trend but it’s
inelastic as its decreasing at a very slow rate with an average yearly decrease
of 0.8% , the supply is also decreasing and its decreasing faster than the
demand, and the prices are clearly moving according to the supply demand theory
which is explained below in figure 1, when the price of petrol is decreased
there is almost nil or no change in the demand as this is an inelastic good
with no substitute goods, however as the people go for alternative goods hence
the demand is at a decline inspite of decrease in price of petrol.

In
case of increase in price, the supply increase from S1 to S2 and the demand is
slightly been decreased, which again proves that the demand being inelastic for
the prices in the short run as seen in figure 2 below.

The increase in petrol price will
impact the demand of diesel in the long run, as can be seen from figure 3. On
rise of petrol prices, the consumers will start taking public transport hence requiring
a government spending on the public transport.

The increase in price is not in
direct conformance with the demand of petrol, as the price of petrol increases
prom P1 to P2 the quantity demanded is slightly increased from Q1 to Q2
similarly on increase from P2 to P3 the quantity of diesel is increased from Q2
to Q3. So a greater increase in price has a lower impact on increase in demand
of diesel in comparison to petro prices.

Similarly
in case of petrol run cars the increase in price of petrol will effect in
decrease in demand for petrol run car as the people will go in search for
alternatives and public transports, The world on the whole has been driving more miles but these
vehicles are definitely not using more oil due to the tremendous increase in fuel
efficiency.

Petrol and the Cars are complementary goods, which implies
that if car is purchased the petrol will be needed to run it so if there is an
increase in price of petrol prices there will an almost equivalent decrease in
demand of cars.

 

The
demand of cars will also be dependent upon two conditions:

1.      The
cars are being modified constantly and the fuel consumption is on decrease which
is decreased from consumption of 8 liters per 100km in 2000 to 5.4 liters per
100 km in 2016. (DVLA Database)

2.      The
existence of alternatives in the form of public transport and electric cars

Comparison
of Price
elasticity of demand for petrol in the short run and Long Run

 

The price elasticity of demand in short
run is going to be inelastic, since petrol is a product with no substitute, so
in short run as the price of petrol will increase its demand is not going to
decrease in short run, which can also be seen by figure 5

In figure 5 we can see that the price of
petrol which was P1 increased to P2 and the quantity demand being inelastic is
increased 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 to
search for better alternatives and substitutes of petrol run vehicles in a hope
to save money. In long run the demand of petrol will decrease on increase in
price.

As can be seen in figure 6 the on an
increase in price of petrol from P1 to P2 the quantity demanded for the petrol
is decreased from Q1 to Q2 in the long run as consumers tends to search for
alternatives such as hydrogen run vehicles, electric vehicles etc.

The increase in price of
the petrol has a positive impact on the revenue , the revenue is directly
related to price of petrol and when the price of petrol decreases the revenue
is decreased and in case of increase in price of petrol increases the revenue.

Assessing value
flexibility from changes in absolute income is known as utilization strategy
which measures the value of versatility of the value.

In figure 7 it can be seen than an
increase inn price of petrol is directly related to revenue keeping some
factors to be constant such as economic and political stability in gulf region.