How would the average US consumers behavior differ depending

How would the average U.S. consumers behavior differ depending on whether oil prices are high or low and how these actions would result in moving the markets toward equilibrium.

Solution

Ans: US consumers behave in the following manner when the price of oil prices are high:

a) Consumer spending falls - In US most families spend about 5% of their total expenditure on gas. So, if gas price increases by 20 % then, expenditure on gas increases by 1%. So, when expenditure on gas becomes 6%, then expenditure on other items fall from 95% to 94%.

b) Car shoppers buy less domestic cars and more imported cars - This is what was observed during the 2008 crisis.

c) Automakers spend less - This is really important. Because as people spend less on cars the automakers also decrease their production and in the process lay off some employees. This will have multiplier effect. Researchers have found that a 1% decrease in consumption will become a 2% decrease in overall spending.

d) Confidence Suffers - Confidence of the people suffers because of an increase in oil price. A 10 % rise in oil price decrease consumer cofidence by 1.5%.

e) Consumers will adjust in the long run - Initially consumers will be shocked. But they would learn to adjust. They would buy small cars rather than trucks or SUVs which are more fuel efficient.

Similarly a decrease in price will initially have a negative impact on the profit of energy companies. But others like utility companies will be benefitted. So, employment would be more which would increase the national income in tge long run. But this decrease in oil price can have some effect in the stock market as well. But, this will also lead to increase in consumer sentiment and spending, more employment and more capital expenditures. So, in the long run the economy would be better off.

When price of oil is increasing it decreases demand for it and supply increases. It can be understood from the behavior of the consumer when they substitute their SUVs for smaller imported Japanese or South Korean Cars. These cars are fuel effeicient and hence the demand for oil will decrease. So, this will create a deficit demand situation. As a result of that the price will decrease and come back towards the original price.