Everyones Gasoline Problem

14 March 2012

Business Economics GM545

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...