Question

The Toyota Prius is a gasoline/electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal noted that sales of the Prius had been hurt by low gasoline prices and that "Americans are now more likely to trade in a hybrid or an electric vehicle for an SUV." Does the article indicate that gasoline-powered cars and gasoline are substitutes or complements? Does it indicate that gasoline-powered cars and hybrids are substitutes or complements? Briefly explain. Source: Sean McClain, "Toyota's Prius Pays Price for Cheap Gasoline," Wall Street Journal, September 6, 2016 .

Short answer

The article indicates that gasoline-powered cars and gasoline are substitutes as people tend to choose between them based on gasoline prices. Similarly, gasoline-powered cars and hybrids are also substitutes as people choose between them when gasoline prices fall.

Step-by-step solution

Identify the relationship between gasoline-powered cars and gasoline

First, determine the relationship between gasoline-powered cars and gasoline based on the given scenario. If the price of gasoline decreases and the demand for gasoline-powered cars increases, the two are likely substitutes.

Identify the relationship between gasoline-powered cars and hybrids

Next, determine the relationship between gasoline-powered cars and hybrids based on the given scenario. If the price of gasoline decreases (thereby making gasoline-powered cars more attractive) and the demand for hybrids decreases, gasoline-powered cars and hybrids are likely substitutes.

Formulate the explanation

The article suggests that as gasoline prices fall, more people are opting for gasoline-powered cars (like SUVs) over hybrids (like the Prius). This implies that when gasoline is cheaper, the demand for gasoline-powered cars increases (people trade in their hybrids for SUVs). Therefore, gasoline and gasoline-powered cars are not used together but are chosen over each other based on price, making them substitutes. Similarly, gasoline-powered cars and hybrids are also substitutes as they are chosen over each other by consumers based on the price of gasoline.

Key concepts

Hybrid Vehicles

Hybrid vehicles, like the Toyota Prius, integrate both a gasoline engine and an electric motor to achieve higher fuel efficiency compared to traditional gasoline-powered cars. The primary advantage of hybrids is their ability to utilize electric power for short drives, significantly reducing fuel consumption and emissions.

Here are a few key characteristics that make hybrids popular, especially when gasoline prices surge:

• Improved fuel economy: Hybrids achieve better miles per gallon (mpg) than conventional cars.
• Lower emissions: Due to less gasoline usage, hybrids produce fewer pollutants.
• Tax incentives: In some regions, purchasing a hybrid might offer financial benefits through tax breaks.

Despite these advantages, sales of hybrids can decrease when gasoline prices drop, as consumers may not see as much cost-saving potential, prompting them to switch back to more traditional vehicles.

Gasoline-Powered Cars

Gasoline-powered cars rely solely on internal combustion engines that burn fuel to operate. They have been the predominant choice for decades due to their reliability and convenience.

Here are some reasons why gasoline-powered vehicles continue to appeal to consumers:

• Wide availability of fueling stations: Gas stations are found almost everywhere, making refueling quick and easy.
• Variety of models: There are gasoline cars to suit every need, from compact cars to powerful SUVs.
• Lower upfront cost: Generally, these vehicles are cheaper to buy than hybrids or electric cars.

However, when gasoline prices fall, the cost of operating these vehicles becomes less of a financial burden, making them especially appealing compared to alternatives like hybrids or electric vehicles. This contributes to a shift in consumer preference towards gasoline-powered vehicles, particularly larger ones like SUVs, as seen when gas prices are low.

Consumer Choice

Consumer choice refers to the decisions made by individuals regarding which products to purchase based on price, preference, and necessity. In the context of hybrid and gasoline-powered vehicles, consumer choice becomes a critical factor when gasoline prices fluctuate.

Understanding consumer choice involves:

• Evaluating costs: Consumers weigh the fuel efficiency and potential savings of hybrids against the convenience and lower initial costs of gasoline-powered cars.
• Lifestyle considerations: Vehicles are often selected based on personal and family needs, such as size, comfort, and driving habits.
• Environmental impact: Increasingly, consumers consider the ecological footprint of their vehicle choices, opting either for cleaner cars or the convenience of traditional ones.

As gasoline prices change, so do consumer preferences. When prices are high, hybrids might be more attractive, whereas low prices shift preferences towards gasoline-powered options, such as SUVs.

Gasoline Prices

The price of gasoline plays a significant role in determining the attractiveness of different types of vehicles. Gasoline prices are influenced by various factors, including crude oil prices, geopolitical events, and regulatory changes.

Here is how gasoline prices impact vehicle choices:

• High gasoline prices often increase the attractiveness of fuel-efficient vehicles, like hybrids and electric cars.
• When gasoline is cheap, the operational costs of traditional cars lower, leading consumers to favor them over more expensive hybrids.
• Price fluctuations can cause rapid shifts in consumer preferences and demand for particular vehicle types.

In summary, the direction of gasoline prices can significantly dictate consumer behavior and car manufacturers' sales strategies, highlighting the importance of ongoing monitoring and adaptation to market conditions.