Microeconomic Issues: 1
Gasoline is one commodity that is directly affected by demand and supply. Currently the average price for gasoline in the United States is $4/gallon (4). Prices are dependent upon the price of a barrel of crude oil, the major component of gasoline. Barrel prices are also a reflection of demand and driven by rising global demand and political instability in several oil producing countries (3). Over half the price of gasoline per gallon may be accounted for by the price of crude oil; the remaining components may include transportation costs, production, taxes, and retailer costs.
Given the supply and demand components, gas prices are consistently changing on a daily basis. The law of demand principle is when price increases, quantity demanded should fall. Also when price decreases, quantity demanded rises given that all factors are held constant. The law of demand is hard to apply to gasoline prices due to the determinants of demand are forever fluctuating. One major determinant for gasoline is the prices of related goods. The most common related good for United States is transportation. Living in Texas one may consider Texas the heartland of trucks and larger vehicles. What I have noticed is many are foregoing larger vehicles due to price of gas or seeking alternative fuel options such as hybrid or electric vehicles. Thus, consumers are decreasing the demand for gas in this particular area. This may result in a shift of the demand curve
On the other side of demand is supply. The law of supply states that higher prices will lead producers to offer more of their products for sale during a given period. If prices fall, producers will offer fewer products to the market. Supply has determents as well. Costs of resources is one determinant that heavily affects gas prices. As previously mention crude oil accounts for over half the price of gasoline. Recently Libya has gone into war. This greatly effects oil production because Libya is...