Everyone's Gasoline Problem

Everyone's Gasoline Problem

Gasoline prices in Metro Atlanta have risen from $3.19 to $3.70 over the last 3 months with no apparent signs of relief with the upcoming warm weather. The fluctuation of gas prices can be attributed to a number of economic reasons. One of the reasons which is debated regularly is supply and demand. Gas prices have been steady climbing for a couple of years, dating back to our conflict in the Middle East with Afghanistan and Iraq. So how is it the law of supply and demand affects our gasoline prices. To answer this question we must have a firm understanding of the basic principles of supply and demand. The relationship between demand and supply determines the prices of gasoline; prices are established by supply and demand. When reduction in supply occurs while demand rises, prices increase at much higher rate. However, on the other hand when we have an increase in supply and a decrease in demand, prices tend to decrease. There does seem to be a cap that is set by consumers indirectly. In recent history we have seen that consumers will start cutting back on expenses when gas prices get near the $4.00 a gallon mark. Many consumers start looking at alternate transportation, while others look to cut back on other expenses. This normally causes a drop in demand and causes gasoline prices to begin the downward spiral once again.

As the demand for gasoline continues to fall, fuel companies come to the realization that consumers have set their mark. Fuel companies are left with the decision of lowering their prices to entice consumers to start buying again and build up demand or they can choose to hold to their prices and force consumers to pay the premium price. The consumer's desire for gas plays a big role in the ultimate pricing structure and this has a direct impact on the supply of gasoline. This along with some competition in the market provides some form of price protection for consumers.

Other factors that have contributed to the decrease of Gasoline is the decrease in the cost of cruel oil and closure of oil refineries here in the US. Since the oil has to be refined to produce gasoline, suppliers some limitations on how gasoline they can produce.

In conclusion, last summer when gasoline spiked at more than $4 per gallon, consumptions declined by more than 5 percent. The sum of 5 percent might not seem like much, but it means all the difference in the price of oil, and therefore, the price of gasoline. As soon as gasoline prices plummeted, consumptions increased. Furthermore, consumers generally have really bad memories when it comes to remembering market lessons and mistakes. After a few months of descent gas prices most consumers return to their old ways of over consumption.

Exercise 2: Chapter 3, Question 14

If the demand for premium coffee goes up as a result of Starbucks introducing the new premium blend, the demand for the blend will rise. Starbucks has created a trend of coffee sales that consumers can't get enough of. It is very likely that the new premium blends introduced by Starbucks would cause consumers to start a premium coffee trend that would cause the demand curve to shift outward or demand curve will shift to the right. This means that the equilibrium