Sunday, May 8, 2011

Is gasoline a substitute or a complement for motorized scooters? Whatever the relationship the demand for them is going through the roof!!

The recent spike in gas prices is benefiting the bicycle and motor-ized scooter industries: 

Bike, scooter sales pick up speed

""Sales of new bikes rose 9% in the first quarter of this year, compared with the same period in 2010, and sales of road bikes — commonly used in commuting — jumped 29%, says Scott Jaeger, senior retail analyst with Leisure Trends Group, a Boulder, Colo.-based retail tracking firm. Sales of gas-powered scooters are up even more: nearly 50% in the first quarter compared with a year ago, says the Motorcycle Industry Council, a trade group. "We see spikes when fuel prices rise," says Ty van Hooydonk, the group's spokesman, noting many scooters average 60 to 80 miles per gallon.  When gas prices last peaked in the summer of 2008, Census data show bike commuting rose 15% nationwide from 2007.""

 Normally we think of gasoline as a complementary good, one that is used with another good such as cars. In this case, as cited in the article gasoline, bicycles and scooters are substitute goods. In economics we define goods as substitutes if the increase in the price of one good increases the demand for another good OR the decrease in the price of one good decreases demand for another good.  The relationship between price and quantity demanded is DIRECT in the case of substitute goods.

The increase in gas prices is increasing the demand for bicycles and gas powered scooters. It is very easy to see that a bicycle is a substitute for gasoline because they are not used together. But it is more difficult to see how a motorized scooter, which uses gasoline is a substitute for, well, gasoline.

I think the easiest way to understand this is to establish the "strength of the connection" between the two goods. Although I use gas in my scooter I am trying to GET AWAY from the high price of gasoline by substituting to a good that will allow me to consume as little gasoline as possible. If gas prices decreased and the demand for, say,  gas-guzzling SUV's increased, then consumers are RUNNING TOWARDS  more gasoline consumption---gasoline and SUV's are Complementary goods--the decrease in the price of gasoline increases the demand for SUV's.  Complements have an INVERSE relationship between price and demand.   

We can extend this to hybrid and other fuel efficient vehicles.  Gas prices increase and the  demand for these categories of cars increases. This meets the definition of Substitute goods.  Gas prices increase and the demand for SUV's deceases. This meets the definition for the goods to be Complements. 

On the AP Microeconomics test, they usually don't divide the line this thin. However, it will be in your interest to deepen your understanding of the differences between Substitutes and Complements.
View My Stats