Tuesday, April 29, 2008

The effect of gas prices on small business

This story tells that tale of some small business owners who have to raise their prices or institute a mileage fee to their clients. There are a couple of things about these stories that bother me. First, while high gas prices certainly put pressure on family and business budgets, these stories seem to suggest that gas prices have gone from almost free to some exorbitant price. But it's not as if gas was a nickel recently. Prices have increased 20-30%, but as the woman in the story notes, she was already paying $75 per week. Now she pays $90. That's not a huge increase.

The second thing that bugs me is that while the demand for gasoline is inelastic, so is price sensitivity. People have been buying SUVs and large-engined cars for a long time. Where was the price sensitivity then? The woman in the story is driving a Ford Explorer to chauffeur around a dachshund! That dog could be moved around on a bicycle. Smaller cars that are more fuel efficient have been available but no one bought them, even though American companies' SUVs routinely were rated as poor quality vehicles. So people don't care about mileage or quality.

What does this tell us about the effect of gas prices? Not much, but we know that we have to keep looking for answers.

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