Course Project

Ronnisha Mosley

Business Economics GM 545

Project Part 1

May 13, 2012

Microeconomic Issue: Everyone’s Gasoline Problem

I was visiting family in O’Fallon, IL which is not far from St. Louis, Mo. Today I went to get gas since I was on my way to St. Louis, MO. In Illinois the gas today is 3.99 and in MO it is 3.75. Of course I bought gas in St. Louis. The prices of gas vary by states, taxes, and competition. Oil and gas prices fluctuate on a daily basis. There are many reasons that may determine the price of gas:

• Oil supply disruptions

• Production of refineries disruption

• The travel season

• Various gas prices

• The need for it

Consumers have to have gas to get to places the places they need to go to. This is a must. When gas is high or low, consumers will buy it, even if it is only $10.00 at a time. The changes in the demand for gasoline and changes in supply affect the price consumers pay. According to Motor Fuels (May 2005), “U.S. refiners typically achieve the balance of gasoline supply and demand not met by refinery production by drawing from gasoline in inventory and by importing gasoline. Gasoline inventory is particularly crucial to this balance because it can provide a cushion against price spikes if a refinery outage temporarily disrupts production. However, maintaining such an inventory entails costs.” According to EIA, four elements determine the price consumers pay for a gallon of gasoline at a given time: (1) the price of crude oil, (2) taxes, (3) refining costs and profits, and (4) distribution and marketing costs and profits.

According to Gerald W. Stone’s Core Economics, demand is the maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant. The law of demand principle is that as price increases, quantity demanded falls, and as price decreases, quantity demanded rises—all other factors held constant. Stone also states, that supply...