On the other side of the scenario, we not only rely on market analysis but also on gas stations (the agent) who we deem as knowledgeable, proficient, and reliable to market gas for the least price possible so that all parties may benefit from the sale. We generally hear about an increase of gas prices on the news before seeing the change at the pumps. Different factors drive the price of gas up and down. While consumers (the principle) have limited knowledge about these factors, we realize there are a number of things that affect prices. The question is if there is a legitimate reason gas prices are rising or is it being done because the agent knows natural gas is in high demand? Is the price increase created to formulate more revenue for the agent or is it because of a shortage in natural resource production? All these factors must be taken in account when considering whether or not we have fallen victim to the principal-agent problem. Principal-agent problems exist when we the consumer (the principal) have very little knowledge of the services needed and the marketer (agent) is motivated to act in their best interests rather than the consumer (principal). The agent is generally at an advantage in a …show more content…
Economically speaking, that relationship is termed price elasticity of demand. Price elasticity of demand is the percentage change in quantity of a product demanded divided by the percentage change in the price that caused the change in quantity. It indicates how responsive consumers are to a change in a product’s price. For example, when gas prices rise, there is normally a drop in the amount of petroleum sold by gas stations. Not only is the amount of gas purchased affected, but where gas is purchased is also affected. People have a tendency to “shop around” for the cheapest gas especially when gas is over $3. Gas prices also affect the sale of vehicles on car lots as well. Price elasticity essentially causes a domino effect from affecting gas purchases, to changes in the amount of gas purchased store by store, to a decline in the number of vehicles purchased from car dealerships. This further supports the law of demand which states that an increase in a product’s price causes a decrease in purchases and a price decrease results in sales increases. So figuratively speaking, people live for price