Economics Commentary Number: 1

Title of extract:

LPG price hiked; petrol, diesel

rates may go up

Source of extract: Internet:

http://www.thehindu.com/news/national/lpg-price-hiked-petrol-diesel-rates-may-goup/article3971900.ece

Date of extract: 6/10/2012

Word Count: 747 words
Date of commentary: 3/11/12
Sections of the syllabus to which the
commentary relates: 1: Microeconomics

LPG :THE BURNING ISSUE

The article talks about the effect of LPG prices in India

Liquefied petroleum gas ( LPG) being the indias main source of cooking, , has
become unaffordable for lower class families and midlle class families due to its
skyrocketing prices. This can be linked to scarcity, a situation where there are not
enough resources to satisfy human needs and wants.
Recently , the lpg prices hiked at 11.42 per cylinder followed by the government
decision to raise commission for dealers , increasing the pressure on common
man.Here are some metropolitian cities with rising LPG prices:
NAME OF THE
CITY
New Delhi

New Price
410.42

Original Price
399

Kolkata

401

412.42

Mumbai

423

434.42

Chennai

386.50

397.92

D1
S
D

Increase in demand for

subsidized LPG Cylinders
resulted an increase in price
by 11.42.This diagram
shows an increase in price
due to change in demand

P1

D1
D

S
Q

Q1

Also, the hike resulted in government restricting the supply of subsidized LPG
cylinders to 6 cylinders per household in a year . Any extra requirements will be
priced at market rates which according to the government will go up from 883.5 to
921.5, which will raise the household budget for consumers.
D1

S
1

D
P
1

This diagram shows a

decrease in supply resulting
in a shortage of subsidized
LPG cylinders with
increasing demand causing
the price to rise from P to
P1.

S
1

D1

Q1

Rising LPG Prices led to consequences for the whole economy .They are:
1. An effect is seen in petrol and diesel prices, which fluctuates frequently. So, The
government decided to raise commission for petrol pump dealers .The commission
paid to dealers will be raised from 23 paisa to 1.72 for petrol and 10 paisa to
for diesel. Earlier, the commission paid was

1.49 for petrol and

1.01

0.91 for diesel.

But the petrol pump dealers have demanded to increase commission for petrol by
2.10 and 1.33 for diesel respectively stating that the petrol pumps are open 24 hours
and 365 days for customers, also providing free services such as water and air
pressure pumps which results in high cost of production for running petrol pumps.
2. Restricting the supply of LPG cylinders to 6 allows the private producers to sell
cylinders at any price to consumer.This is termed as Black market or underground
economy , which is bad for any economy.
3. The prices will continue to increase as the root cause of LPG prices rising is increase
in international oil prices, which results in increase in import tarrif for oil companies,
which leads to balance of payment instability and fluctuations in the rupee dollar
exchange rate will directly affect the Lpg prices in the next future years.
4. Seasonal changes such as winter , increases the consumption of LPG by
approximately 1 to 2 cylinders per month.As government has restricted to 6 cylinders
per year, the consumers would not be able to buy after 6 cylinders at a subsidized
rate. So consumers have to pay more to use LPG cylinders.
5. Some businesses such as catering, which needs a bulk supply of LPG cylinders, would
restrict their supply and will charge more from their customers.In turn, this would decrease
the demand for catering services and would become a loss making business.

LPG has many substitutes such as natural gas and kerosene. Substitute is (A
product or service that satisfies the need of a consumer that another product or service fulfills. A substitute can be perfect or
imperfect depending on whether the substitute completely or partially satisfies the consumer). Kerosene

and
natural gas are cheaper and eco friendly to use. The diagram below shows how
substitutes affect a good such as LPG

A substitute decreases
its price, increases the
demand for its product .
In this case , keresone
and natural gas are
cheaper to use and they
have huge demand by

D1

P1
D1
D

Q1

In my opinion, LPG, a basic nessecity for every household needs its price to be on
hold so that the poor families can afford it or the consumers have to switch over to
other substitutes for their consumption .

BIBLIOGRAPHY

1. I have taken the images from:1. Google images: http://articles.economictimes.indiatimes.com/2012-0826/news/33402354_1_indane-and-bharat-gas-lpg-connections-lpg-dealers

2. http://tntmagazine.in/news/meghalaya/lpg-cylinders-seized-in-shillong/
3. http://www.cartoq.com/expertvoice/going-green-and-cheap-should-you-pick-lpg-or-cng/
2. The definition of substitute is taken from:http://www.investopedia.com/terms/s/substitute.asp#axzz2B9u6gphb

THE Article has been taken from:

http://www.thehindu.com/news/national/lpg-price-hiked-petrol-diesel-rates-may-goup/article3971900.ece