Analysis of price and income elasticity of demand for fuel products in Malawi

Kamkwamba, Dasford D. (2009-03)

Thesis (MBA)--University of Stellenbosch, 2009.

Thesis

ENGLISH ABSTRACT: This paper examines the price and income elasticity of demand for fuel products in Malawi. The data have been disaggregated into various sectors, agriculture, industry, construction, commercial transport, private motor vehicles and household, in order to fully understand the nature and magnitude of elasticity for each sector. Two methods were used - the simple economic method and the correlation coefficient method. This research covers a period of 10 years from 1995 to 2004. This period has been chosen in order to arrive at meaningful conclusions. The results show that each sector responds to price and income changes differently. The agricultural sector has been found to be inelastic to both price and income both in the short and long term. This sector, however, is sensitive to other factors like drought and currency depreciation. The industrial sector has been found to be very sensitive to both price and income changes both in the short and long term. The same trend has also been established for the construction sector and the commercial transport sector. In the private motor vehicle sector, petrol-powered private motor vehicles have been found to be inelastic to price as well as income both in the short and long term. The reason for this is lack of affordable alternative forms of transport. Tests for diesel-powered vehicles show very elastic results. The demand data may have been distorted by the fact that diesel demand for other equipment than vehicles could not be identified and it has been assumed that diesel bought at filling stations or reseller points is used by vehicles. There is evidence that diesel is also used for maize mills and generators. The household sector has been seen to be very sensitive to price and income changes. The reason for this is availability of substitutes such as charcoal, firewood and other forms of biomass fuel that are extensively used in rural areas. Income sensitivity is purely due to the fact that people in rural areas earn low income. The conclusions for the household sector are that first the government should remove the paraffin subsidy as it is not achieving its intended results. Secondly, the government should establish basic wages and also offer better prices to the subsistence sector.

AFRIKAANSE OPSOMMING: Hierdie proefskrif ondersoek die elastisiteit van prys en inkomste in die aanvraag na brandtstofprodukte in Malawi. Om die aard en omvang van die elastisiteit in elke sektor ten volle te verstaan, is die data gedesegregeer in verskeie sektore, naamlik landbou, nywerheid, die boubedryf, handelsvervoer, privaat motorvoertuie en die huishoudelike sektor. Twee metodes is gebruik: die eenvoudige ekonomiese metode en die korrelasie-koeffisient-metode. Hierdie navorsing beslaan 'n tydperk van tien jaar vanaf 1995 tot 2004. Die tydperk is gekies om sodoende betekenisvolle gevolgtrekkings te kan maak. Die resultate dui aan dat die sektore verskillend op veranderings in prys en inkomste reageer. Daar is bevind dat die landbousektor glad nie elasties is nie wat betref prys sowel as inkomste, sowel op die kort- as langtermyn. Hierdie sektor is egter sensitief vir ander faktore soos droogte en die depresiasie van die geldeenheid. Daar is bevind dat die nywerheidsektor baie sensitief is vir prys-, sowel as inkomsteveranderings op die kort- en langtermyn. Dieselfde neiging is bevind vir die bousektor en die handelsvervoersektor. In die privaat motorsektor is bevind dat petrolaangedrewe motors nie elasties is nie wat betref prys sowel as inkomste op die kort- sowel as langtermyn. Die rede hiervoor is die gebrek aan bekostigbare alternatiewe vervoermiddels. Toetse vir dieselaangedrewe motorvoertuie dui uiters elastiese resultate aan. Die data wat betref aanvraag kon moontlik verkeerd voorgestel word as gevolg daarvan dat die dieselaanvraag vir ander toerusting as voertuig nie geidentifiseer word nie. Daar is veronderstel dat diesel wat by vulstasies en herverkooppunte gekoop is, vir voertuie gebruik is. Daar is bewyse dat diesel ook vir mieliemeule en kragopwekkers gebruik word.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/14901
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