论文Analysis of Supply and Demand The Law of Supply and Demand.doc

Legal aspects of papersLegal aspects of papersThe Market of Gasoline PricesEcon 002Section 008Group 60Peter BumbargerWilliam GardnerAnand TarparaIntroductionThe United States is constantly in motion. There are countless members of the American workforce that travel to and from their place of employment everyday that require a means of transportation. Almost all efficient forms of transportation require a type of locomotion called the internal combustion engine that which requires the fossil fuel gasoline. As it can be noticed, gasoline carries a very important role in the American economy, and without it, the economy would be slowed down significantly. Gasoline is arguably the most important resource of our era. It pumps like blood through the veins of our economy. It flows from other nations to our refineries, where it is processed. Then it is passed onto the consumer who uses it to maintain a standard of living unrivaled in the span of human existence. If gasoline is the blood of civilization, one can argue that the fluctuating price of gasoline is its pulse. As economists, it is our job to monitor this pulse and see how it is affected, and to see what effects it has upon us. In the past ten years the price of gasoline at the pump has over doubled. This has an incredible impact on Americans in ways that they may not suddenly realize.Recently, the price of gasoline per gallon has been skyrocketing, dropping, and then rising again. As for most cases in economics, this can be explained by the laws of supply and demand. This can only explain the enigma only to a certain degree. There are external and internal factors that are also present.Analysis of Supply and DemandThe Law of Supply and DemandThe law of demand states, “When the price of a good goes up, people buy less of it, others things being equal. When the price of a good goes down, people buy more of it, other things being equal.” This is the case for all goods under ceteris paribus, meaning all other things equal. Because of this, the demand curve has a negative slope. The law of supply says, “At higher prices, a larger quantity will generally be supplied than at lower prices, all other things constant. At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.” The supply curve has a positive slope because as price increases along the y-axis, quantity increases along the x-axis.Where the demand curve intersects the supply curve is at a point called the equilibrium point. It is where supply equals demand. This is important because this is also known as the market clearing price. At the equilibrium, profits and consumption are maximized.If the number of gasoline stations in a local market expands significantly how will this impact the equilibrium? What will happen to the price of retail gasoline in this case?If there is an increase in the number of gas stations in a local market, then that market will have a greater supply of gasoline. The additional gas stations add to the overall supply for the area. This would cause the supply curve to shift to the right because there is more gasoline. If the supply curve shifts to the right then the equilibrium point will drop down.Since there are more gas stations in the area, then the consumer will have more choices of places to buy. Let us assume that a customer lives seven miles from gas station A. They don't mind making the journey to get gas because it is a necessary good, and it is the closest gas station for miles. However, if gas station B opens up two miles from the customer's house, the customer will then choose to go to gas station B. Even if the price is exactly the same, they will choose gas station B because it is closer. The owner of gas station A notices his slump in sales and decides that in order to compensate for his loss of customers; he needs to drop his price of gasoline. By dropping the price, the customer may think that it is worthwhile to go out there way in order to save money. However, now gas station A is taking customers from gas station B, C, D, E.etc. These other gas stations need to compensate for their loss of customers so they lower their price also. When gas station B opened up, it upset the market equilibrium. The scales were shifted and supply grew. It was the markets job soon after to make up for it by lowering their prices. This causes a renewed equilibrium.If gasoline taxes are increased by 25 cents per gallon in Pennsylvania, how will this impact the price of retail gasoline and the quantity sold? Will consumers or producers pay the majority of the tax increase? Refer to elasticity to strengthen your argument. If gasoline taxes were increase by 25 cents per gallon in Pennsylvania, then the price for gasoline for the consumers would raise 25 cents to cover the tax. If the producers understand the law of elasticity, then they will not have to pay for the tax increase at all. Gasoline is an inelastic good; people need it to maintain their quality of living, so there would be an infra-marginal drop in the sales of gasoline.The orange area is the producers revenue. By imposing the tax, the government makes extra revenue (green area). However, the producer still makes the same amount. The consumer is the only one to incur the cost.Are gasoline prices higher or lower in Pennsylvania than in other states? Discuss any differences you find.The price of gasoline per gallon in Pennsylvania is $2.14. The price in other states is higher, as it can be seen in the chart in Figure One. California has the highest at $2.51. Another correlation can be drawn by looking at the average gas price in each region of the United States (Figure Two in the Appendix). Gas is cheapest in the Midwest at $2.17 and the highest is on the West Coast at $2.54. The price of gasoline in Pennsylvania is around average.Describe how a major supply shock (such as hurricane Katrina) impacts the Gasoline market in both the short and long-run.A disaster like hurricane Katrina has a profound impact on the gasoline market. A considerable percentage of oil refineries are in the gulf coast region. In fact it is one of the prominent petroleum refining areas in the country. When a hurricane like Katrina and the subsequent Rita roll through the area, one of two things are relevant to our discussion happens to the refineries. They have the option to close the refinery until the storm rolls through. The amount of time that refinery has to remain closed severely reduces our ability to produce gasoline. Our country's supply of gasoline drops, which in turn moves the market clearing price up. This is only a short term problem because after the disaster they can open up again and reach their production levels again, which will put the MCP back to normal.The other thing that can happen is that the refinery will be destroyed. This will cause the same short term problems as our first scenario, but it has a much longer effect in that it takes a lot longer to build another plant. It also should be noted, that in the case of the United States, oil is primarily an import and not self-sufficient. Since the majority of oil on earth is located in the Middle East, oil prices around the world differ from one country to another. How are the prices decided?The Organization of the Petroleum Exporting Countries (OPEC) was founded at the Baghdad Conference during September of 1960 as an intergovernmental association with five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. This organization was founded to protect oil producing countries by setting and enforcing policies. In its brief history, as of 1999, three tragedies occurred; two in the 1970s and one in the early 1980s. Prices peaked at record highs in 1973 and 1979, the Arab Oil Embargo and the Iranian Revolution, respectfully. The third was in 1986 due to dramatic decrease in price. A fourth crisis almost occurred when the situation in the Middle East heightened, causing panic in the market. This was corrected by OPEC by increasing output. When the price of gasoline rises, consumers don't just feel it at the pump.How do gasoline prices in the United States compare with the prices in other countries? What causes theses differences to be so large?Gasoline prices in the United States are relatively cheaper than the rest of the world, excluding the OPEC countries. The price is so much higher in other countries because they have a more dense population and fewer resources for oil production. This means that countries like Germany have a higher demand on oil from foreign nations than the United States does. Also, the price of gasoline depends on cost of transporting the gasoline to the country, the labor involved, and any federal taxes that are applied on the good. These reasons show why Qatars gasoline price is substantially lower because they do not have to worry about transporting the gasoline over a long distance and the gasoline is not taxed in that country because it is so abundant there. Refining costs differ due gasoline standards in different countries; add to the cost of gasoline. Time SeriesGas prices have changed over the past twenty years. In January of 1978 was $13.28 a barrel, and today it is $51.74 (as if the first week of November 2005). The price per barrel was almost constant from 1978 to 1989. Then the prices showed a general trend of increasing prices with a few dropping points. The cause for the recent raises in the price per barrel is due to the recent hurricanes in the Gulf Region. The total difference in price over the past twenty years is $38.46. (Figure Three)ConclusionIt is possible to estimate the price of gasoline using the laws of supply and demand. However, there can always be negative externalities that can cause unwanted shifts in the demand in supply curves, which can cause undesired market changes. The recent hurricanes in the gulf region can cause such externalities. Also, there are political situations that can arise that can also affect the market. For instance, unstable political ties with oil producing countries can cause unwanted shifts, also.In the near future, gasoline prices will continue to fluctuate as they have been over the last couple of months. We expect there to be a steady increase in the average cost of gasoline that will coincide with the inflation rate. However, we also believe that newer technologies that have recently been unveiled will eventually help to phase out our dependency on gasoline as a nation. Gasoline will always be a part of our lives. Even if these newer technologies, like hybrid-cars, help us use less gasoline, it is still such an incredibly useful tool that it will never be truly phased out.AppendixFigure OneFigure TwoFigure ThreeDivision of LaborIntroduction: Peter Bumbarger, William Gardner, Anand TarparaLaw of Supply and Demand: Peter BumbargerNumber of Gas Stations: William GardnerPA Gas Tax Increase: William GardnerState Gas Price Comparison: Anand TarparaMajor Supply Shock: William GardnerGlobal Gas Prices: Anand TarparaTime Series: Peter BumbargerConclusion: Peter Bumbarger, William Gardner, Anand TarparaWorks Cited and Paper Organization: Peter BumbargerWorks CitedAmerican Petroleum Institute. 2005. 15 November 2005. <http:/www.pbs.org/now/politics/gasprices05.html>California Gas Prices. 2005. 16 November 2005. <>Energy Information Administration. 2005. 12 November 2005. < http:/www.eia.doe.gov/>.Georgia Gas Prices. 2005. 16 November 2005.< >Indiana Gas Prices. 2005. 16 November 2005. <>Kshitij Consultancy Services. 2005. 15 November 2005. <The Japan Times. 2005. 15 November 2005. <http:/search.japantimes.co.jp/print/news/nn09-2005/nn20050927a4.htm>Miller, Roger LeRoy. Economics Today The Micro View. Boston: Addison-Wesley, Inc., 2006.New York Gas Prices. 2005. 16 November 2005. <>PBS. 2005. 15 November 2005. <http:/www.pbs.org/now/politics/gasprices05.html>Pennsylvania Gas Prices. 2005. 16 November 2005.<>