Supply Demand In Gas Price Essay

3605 words - 15 pages

Microeconomics Project Paper
Course Project 1
Economics 545
Summer 2014 Session B
Prof. William Mapp
Patricia Shomo
September 13, 2014

Situation C
Last night about 7pm, I went to fill up on gas at the closest gas station by my home in Merrillville, Indiana. The Speedway gas station had gas for $3.49 a gallon for regular unleaded gas. Midgrade gas was $3.69 a gallon, Premium was $3.89 a gallon, and Diesel was $3.89 a gallon. I always try to fill up before the work week, as I do not want to get stuck in Chicago, Illinois where I work, and have to fill up on gas. Gas prices are dramatically different in my 40 mile radius. Today, gas prices in Chicago off my exit for work are ...view middle of the document...

Gas prices seem to be the one of the most fluctuating and variable prices that we deal with. Gas prices may suddenly and dramatically go up one day, after being somewhat constant for a period. The final gas price per gallon includes crude oil prices, refining costs, distribution costs, marketing costs, and federal, state, county, and local taxes. Gas prices also fluctuate because of oil supply disruptions, refinery disruptions, political factors, demand, and world conflicts like the Ukraine Crisis, Gaza Strip bombings, and now ISIS terrorists in Syria.
Demand Determinants
In economics, demand is defined as the goods and services people are willing and able to buy during a certain period of time at various prices, holding all other relevant factors constant (page 70, R.G. Hubbard, & A.P. O’Brien). So, in our case the demand in motor gasoline has been touchy. As gas prices go up, demand should go down, and vice versa, when gas prices go down, demand should increase. The Law of Demand basically demonstrates the relationship between the price of a product, and the quantity the consumers demand on that product (page 71, R.G. Hubbard, & A.P. O’Brien). Currently, the days of gas guzzling giant SUVs and Hummers are gone, now comes the age of more fuel efficient vehicles and more compact vehicles. Hybrid vehicles are displaying strong numbers as consumers are trying to rely less and less on fuel. Some hybrid vehicles have demonstrated up to a 50% fuel reduction (6th paragraph, C. Johnson). For example, I used to drive a 2000 Chevy Impala that held about 17 gallons of gas, which I used to fill up twice a week and that was only going to and from work. When gas was under $3.00 a gallon it wasn’t too bad, but when gas prices sky rocketed in 2011 to over $4.00 a gallon is when it really hurt. On average I was doing about $140 a week for my twice fill ups for my impala, or about $560 a month on gas! Well after several car issues, I decided it was time to get another car. Gas prices had a huge impact on my next car. I purchased a hybrid, and have cut my gas spending in half. If this trend keeps goings, that means the demand in gasoline will also decrease. Consumers, including myself, are scared of the possibility of those $4.00 for a gallon of gas will come back. This will have an impact on my cousin and his idea of opening up a gas station. When gas prices jump up, consumers tend to cut back on everything including driving to cut back on how much they spend on gasoline. In the chart below of the 60 month or 5 year average retail price of gasoline prices of Gary, Indiana, which is the nearest city to us. It displays the extreme up and downs of gas prices. We have not seen under $3.00 for a gallon of gas since 2010.

(2014, GasBuddy)
According to eia, an independent Statics and Analysis for the U.S. Energy Information Administration, the current 2014 demand in the United States for motor gasoline for the sales type of sales...

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