Price of related goods or services is a determinant of demand changing. The price of complementary goods or services raises the cost of using the product, and the demand falls. For example, when gas prices rose to $4 a gallon in 2008, the demand for cars fell.
In 2008, crude prices have increased more than 40%. The average price is $4 a gallon or more in 14 states and the District of Columbia, according to the survey. California pays the most for gasoline, averaging $4.436, with Alaska and Connecticut both at $4.296.
Higher gas prices have prompted a growing number of Americans to modify their driving habits. A study by the Department of Transportation showed that the number of drivers on the road in March fell 4.3% versus the previous year. That was the first time March travel on public roads fell in nearly 30 years.
In addition to driving less, many consumers are shifting away from large, low mileage vehicles toward smaller vehicles that consume less gas.
Falling demand for gas-guzzlers has hit some of the nation’s largest automakers hard. General Motors announced plans last week to shut four truck and SUV plants and said it would ramp up producing more fuel-efficient cars. Ford also recently said it would trim production of large trucks and roll out more small cars and crossovers.
But carmakers aren’t the only ones hurt by soaring gas prices. The airline industry, which was ailing even before gas prices spiked, has been fraught with near-bankruptcies, drastic cost-cutting efforts and mass groundings of aircraft.
In June 2008, Continental Airlines said it is eliminating about 3,000 jobs and grounding 67 mainline aircraft to cope with the rising cost of fuel. Other airlines have hiked fuel surcharges to fares and added fees to once-free benefits, such as food and checked baggage.
This is the diagram in this case. The supply curve shifts to the left since the cost of factors of production (factor or resource prices) increases.