Hydrocarbon Fuel - Ethanol
Customer Awareness:
NutraSweet, a branded sweetener, was discovered & approved by FDA, but people didn’t opt for it ,as it had a wrong assumption that it tastes very sweet & has high calories.
To increase the awareness globally, a sweetener brand name was given, and NutraSweet initiated an advertising campaign to promote it. The reason for customer preference to change positively for this product, NutraSweet is that it has taste like sugar but no calories. This transition has been made by increasing the customer awareness for the product.
Similar situations happened with ethanol fuel as people were ignorant of the facts behind it. It was also observed that customers’ preferences for ethanol fuel was too low. There was a need to generate awareness in the market. If we observe the conversion cost of an automobile to run on flex-fuel (automobile can run either on traditional gasoline or E85, a mix of 85 percent ethanol and 15 percent gasoline) it is around $100. The end results could be huge demand for automobiles which are compatible for flex-fuel and thus consumers will enjoy the benefits of ethanol fuel.
Economy:
Due to the use of Ethanol there is a probable chance for the west to depend heavily on Mid-East for crude oil & also to cover up the trade deficit to some extent. But at the same time we can see the dependencies for corn which is used for making ethanol fuel in United States is dependent on import to a certain extent.
Due to the use of corn in production of ethanol, the prices of food products are soaring high due to under stock.
If we observe the statistics, “Brazilians have already seen the benefits of ethanol fuel which is produced by sugarcane. The benefit is not only in terms of less pollution but also it cost them 50% cheaper as compared to imported gasoline as well as balance of payments. Brazil has converted nearly all its cars and gas pumps to run on a 96 percent ethanol fuel.”
Cross elasticity of demand:
Economists have recognized that competition can be seen not only in the homogeneous product but in heterogeneous product too. For example, increase in corn price may lead to increase in demand for meat. When the 1% change in price of one good lead to the increase in 1% of quantity sale of another good, co-efficient of cross-elasticity will be 1.
In case of corn and other food products, when the price of corn will increase by some percentage that will lead to the percentage increase in consumption of other food products leading to cross-elasticity of demand. On the other hand we can also compare the cross-elasticity of demand of ethanol fuel with oil. In case of ethanol fuel and oil the
cross elasticity of demand will be very high. The advantages such as air pollution will lead people to shift there demand from oil to ethanol fuel.
The relation-ship between ethanol fuel and oil not only depends on the price, but depends on the availability of ethanol fuel. For example, it can be seen in states like California where there are no gas stations which sells ethanol fuel. There the cross elasticity between oil and ethanol fuel will be very less. Not only the price but the efficiency of ethanol fuel as compared to oil, consumer awareness for the product and also for compatibility. For example, the number of cars available in the market which are compatible to use blended ethanol fuel to the price of such cars, being indifferent from the price of normal petrol/ diesel cars.
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