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Economics: Determinants of Fuel Prizes in New Zealand (Other (Not Listed) Sample)


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In New Zealand, the price you pay for a litre of petrol is made up of the import cost of petrol, the gross importer’s margin (the amount the fuel companies earn to offset their shipping and operating costs, plus profit margin), and the relevant taxes (including duties, levies, ETS (emission trading scheme) and GST (goods and services tax)).[1] For example, the average price of regular petrol was 200.3 cents per litre in March 2021, which includes the import cost of 61.52 cents, the gross importer’s margin of 23.11 cents and the taxes of 115.67 cents.
A. Given what you understand about the demand and the supply, use two diagrams to explain respectively why petrol prices in Auckland declined sharply in March 2020 and why they increased gradually in the first half of 2021. [Hint: you may consider the implications of the lockdowns in Auckland and around the world.]
B. List two or three major determinants of the price elasticity of petrol demand. Do you think that petrol demand in Auckland is price elastic or inelastic? Explain the economic logic and search for some empirical evidence to support your claim.
C. Suppose the government plans to cut the relevant taxes (duties and levies) on petrol. Based on your findings in task B, use a diagram to show the impacts of tax cut on the petrol price and the sales volume. Use the diagram to show the impacts of tax cut on consumer surplus, producer surplus and social surplus. How do your findings depend on the price elasticity of petrol demand? [Hint: you may review the lecture slides of topic 3 before addressing this question.]
D. Suppose, instead of cutting taxes, the government planned to introduce a price ceiling at $2 per litre in the first week of June 2021 to address the petrol price hike. Use a diagram to show the impacts of price ceiling on the petrol price and sales volume. Explain whether all individuals who want to buy at the price ceiling can get their desired amount of petrol.
E. Suppose that the petrol price ceiling only applies to the sales of formal fuel companies, while individuals are allowed to buy and sell a small amount of petrol at the prices mutually agreed among them. Explain how individuals may profit from this policy. What could be the related costs to the society? [Hint: think about the grey market.] Based on your analysis, do you think the policy of price ceiling will be beneficial for society?


Determinants of Fuel Prizes in New Zealand
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Determinants of Fuel Prizes in New Zealand
1819275194310Demand 00Demand 152400070485
In march 2020, petrol prices in Auckland declined due to lockdown during the pandemic. The demand for petrol decreased significantly since the need for transportation dropped upon confinement of people to their homes. Additionally, there was a global surplus of oil when the pandemic began. To contain the pandemic, factories were shut down and policies to limit movement applied which resulted to decrease in demand of petrol (Venuto, 2021). However, the supply remained the same and later increased and this resulted to low prices. From the diagram, demand shifts to the left, while supply of petrol remains constant. Therefore, the petrol prices drop.
3962400988695supply00supply2647950226695Demand 00Demand 1438275750570Price00Price35147252245995Quantity00Quantity20383501078865225742546926520193004349750
Likewise, in 2021, there was a gradual increase in petrol and it was triggered by relaxation of lockdown conditions, high taxes and an increase in gross importers margin. Upon the discovery and learning to contain COVID-19 measures, lockdown conditions were uplifted and this increased to normal movement (Venuto, 2021). The demand for petrol increased while the supply decreased which resulted to high petrol prices. Additionally, the companies had to offset the losses incurred during the period of lockdown and there was an increase in taxes. The diagram shows an increase in demand and a decrease in supply which results to a high price.
The major determinants of price elasticity of petrol demand are price, income and availability of substitute. Petrol demand in Auckland is price inelastic. Even though the price for petrol increased, there has been little influence on demand. When the price of a commodity goes up, the purchase is likely to decrease. However, Auckland is estimated to have an elasticity of -0.15 and this implies that if the price hikes by 10%, there will be less purchase of petrol by 1.5%. Thus, Auckland is price inelastic (Polkinghorne, 2021). According to nominal weekly prices in Auckland, the relevant tax and GST, are considered to be the largest contributor to high price of petrol (Polkinghorne, 2021). Thus, if the government decides to eliminate or cut taxes, the price of petrol will be less. Despite the discounted price playing a role, it is pretty little to the supposedly inelastic petrol. To determine the price elasticity of petrol demand, meta-analytical techniques are used. Some of the meta-analytical techniques include the price elasticity of petrol demand, and impact of approximated elasticity values (Polkinghorne, 2021). To obtain accurate estimates different approaches are used since they enable gathering information from different types of elasticities.
7334252828925Producer surplus 00Producer surplus 105727522479000039147751304925Tax revenue 00Tax revenue 151447515068550063795011492852362200701675S-tax00S-tax1876425180975Consumer surplus00Consumer surplus108585041910000590550295275-15432901628445-216249051388570455065680582839021605256000752276475006096001114425006286501638299005905500
4048125106680Demand 00Demand
The price elasticity of supply and demand of petrol is greatly impacted by taxes. However, if the government cuts taxes and duties on petrol, producers will supply more to meet the increased demand by consumers. Generally, the tax burden falls on both producers and consumers. If petrol is taxed, the producer will definitely pass some cost to the consumer and this limits the consumer demand for the commodity (Hutchinson, 2017). At every quantity level of the market, the supply and demand curve will shift differently upon government cutting the tax. When tax is cut, producers will reduce the cost per until of petrol. The consumers will have a high demand since the price of petrol has decreased. If the government cuts relevant taxes, the supply curve will shift down while the demand will shift upwards. Eventually, the tax cut by the government will result to creation of a new equilibrium depending on the customers willingness to buy.
left415925Price 00Price 47625019685000D
15906756985Demand 00Demand 14573251924050088582412573000
36957001123315Quantity 00Quantity 3561715164465Price ceiling 00Price ceiling 14763753257550027527243549640048577533591500504825125031500
A price ceiling will control the price and the above diagram will be helpful in analyzing demand and supply framework. The horizontal line, price ceiling, shows the legally maximum price of petrol set by law. Even though, there are underlying forces to shift the demand curve to the right since the demand is high than the supply (Dean et al., 2020). A price ceiling creates a high demand which exceeds the supply thus there will be shortage of petrol if it is set to be at $2 per litre. Even though the sales volume of petrol is high, not every

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