Gasoline Prices and the Effect on the Supply and Demand of Other Goods and Services

Essay by fearlssldyUniversity, Bachelor'sA+, October 2006

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Gasoline Prices and the Effect on the Supply and Demand of Other Goods and Services

"A market force is an economic force that is given relatively free rein by society to work through the market." (Colander, 2004) As supply decreases prices increase and as supplies increase the cost of goods decrease. This paper will discuss gasoline prices and the effect on the supply and demand of other goods and services.

Gasoline prices in March of 1981 reached $1.42 a gallon. Adjusted for inflation the price of gasoline today would be $3.11. (Raabe, 2005) Although gasoline prices have not kept up with inflation, they have seen a dramatic increase in recent history. Self serve gasoline prices in California sold for an average of $2.541 a gallon. These gas prices show a 37.9 cents increase over the previous year's price according to the EIA (Energy Information Administration). (Peltz, 2005) The national average for the same time period fell 2.8

cents to $2.289 a gallon. Fuel prices surged recently in part due to the increase in crude oil prices to more than $61 a barrel. Factors other than demand affect the price of gasoline. Inclimate weather from tropical storms and hurricanes can cause damage to oil equipment in the Gulf of Mexico and other refineries resulting in reduced production or even temporary closure. These closures cause decrease in the supply which triggers an increase in price. (Peltz, 2005)

Demand, as defined by Colander (2004), is the consumers' willingness and/or ability to pay. Demand differs from want in that you may want a good but if you are not willing or able to pay for it you do not demand it. As gasoline prices increase the ability and/or willingness of the consumer to pay for it is inhibited. Therefore, as gasoline prices increase there...