TAK MENG CHOY Business Economics GM545 Summer Session 2010 [email protected] com Everyone’s Gasoline Problem Gasoline prices in Hennepin County have risen from $ 2. 283 to $2. 69 over the last 12 months with a series of price fluctuations in between. Prices fluctuate for a number of economic reasons. One such reason is supply and demand. We have seen gas prices raise after 9/11 and more importantly after the start of the war with Iraq. So, why does supply and demand lead to fluctuation of gasoline prices? It is quite simple if we understand the laws 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 quickly. However, on the flip side of this when the supply increase while demand decrease, prices decrease. It is interesting to see how the results of the consumers reaction to high gas prices (when the prices were expensive due to a limited numbers of suppliers but lots of demand) has now in essence contributed to the prices decreasing.
Since price had reaches high levels, consumers have attempted to find alternative measure for transportations need and this demand for gasoline has decreased and caused a decrease in gasoline price. Gasoline became less demanded because buyers didn’t have the desire to pay for it. The desire for gas lessens and this impacts the supply of gasoline. With the producers of gasoline being burden and having the surplus of gasoline, leaves the suppliers with limited options, lower the cost of the gasoline to generate some revenue or to not adjust the price and continue to experience the effects of not having it sell and thus losing revenues.
This is the beauty of the free market system, consumers have the ability to assist with establishing the price of goods and services. Other factors that have contributed to the decrease of Gasoline is the decrease in the cost of cruel oil. Since the oil is refined to produce gasoline, suppliers having to pay less for materials caused to decrease the price. 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.
But as soon as gasoline prices plummeted, consumptions increased. Furthermore, short sighted people started buying SUV again. Consumers don’t understand how much power they have over the price of a gallon of gasoline, and it’s about time that consumers realized that. Exercise 2: Chapter 3, Question 14 In case the demand for premium coffee goes up as a result of Starbucks introducing the new premium blend, the demand for the blend will rise. The new premium blends cause consumers to crave coffee and shifts the demand curve outward or demand curve will shift to the right.
This will mean that the equilibrium price and quantity both will go up. This causes the quantity sold to increase as well as the price, since sellers have to work harder to produce the greater amount of coffee. Initially, Starbucks quickly sells out of its premium blends. It raises its price as it works to increase production. The higher price enables it to produce more that it could otherwise. Eventually, it is able to provide sufficient premium coffee to meet the higher demand levels. If the premium coffee crop were destroyed, clearly production of premium coffee would grind to a halt.
The supply curve would shift backwards, resulting is a lower quantity sold and a still higher price, as the market attempts to allocate the little premium coffee remaining to the buyers who want it the most. Exercise 2: Chapter 3, Question 15 Orange crops were smaller in late 2006 and early 2007. The US also decided to reduce gasoline consumption and increased production of ethanol from corn and other grasses. Higher gas prices meant that farmers used their farms to produce corn that could be sold at a higher price to make ethanol.
Thus even though the crop was being produced it was not being used as food, but as an input in production of energy. Corn is the staple food crop of the country being used in virtually everything we eat (remember cereals, breads, high fructose corn syrup, universally used as a sweetener etc. ). The diversion of this to make ethanol meant that people had to look for other items to eat. This reduced the supply of corn, and increased the demand for other food products: both recipes of higher price. The overall food market saw prices go up as a result of these events.
Fruit production fell down, corn was being used elsewhere, and therefore, the supply of food fell, shifting the supply curve to the left and raising the price. The demand for other food products rose, again contributing to higher prices. References http://www. minnesotagasprices. com/ www. associatedcontent. com/article/1325264/gasoline_prices_punch_the_person_f lling. html? page=2&cat=62 http://goldprices. com/index. htm/ http://www. purchasing. com/article/CA6499710. html? industryid=48399