Fluctuating Prices of Gasoline

1. Everyone's Gasoline Problem. We are all familiar with fluctuating prices of gasoline at the pump. Why does this happen? Research the recent history of gasoline pricing in your area, and attempt to relate any fluctuations you observe to documented supply and demand factors outlined in our book. Be sure to cite any references used.

Answer: The cause is that fuel demand and supply is inelastic.2 This is due to the fact that the lack of alternatives to fossil fuel, lack of retail competition, and too much market speculations. In the long run consumers could find alternatives to fossil fuel and bust the monopoly but for now we are at the mercy of the fuel companies.

The following law of demand does not apply to gasoline. The law of demand states all else being equal, as price falls, the quantity demanded rises, and as the price rises, the quantity demanded falls. This is an inverse relationship.1 Supply must also be taken into account. The law of supply states that as prices rise, the quantity supplied rises, as price falls the quantity supplied falls. This is a positive relationship. If gasoline demand rises or a disruption of supply occurs; pressure will be placed on the price. The inverse is also true, if a surplus exists or demand for gasoline falls then less pressure will be put on the price. Competition between retailers could cause prices to fluctuate. If competition does not exist and the retailer is the only player then there is monopoly and the price may be higher. The price of oil has risen because of its demand around the world. The unrest and war in the middle east and other oil producing countries has also driven prices to an all-time high of 101.5 per barrel for March 2008.2 The determinate of change in resource price has shifted the supply curve to the left. The increase in the price of oil reduces the supply of gasoline. Demand has not decreased in the short run even though prices have risen.

15. In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?

Answer:

- The reduction in orange production will have an effect of reducing supply while the demand remains the same. This means that supply and demand do not match and as a result customers will now have to look for alternatives such as imported products. Imported products have extra prices on them because of cargo, transportation, and customer fares. Because of this the locally produced orange will have higher prices