Everyones Gasoline Problem

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EXERCISE 1
QUESTION 1. Everyone’s Gasoline Problem

It is a fact that gasoline prices can become high enough that consumers will make

substantial reductions in their gasoline purchases. Depending how much prices increase

relates on how easily consumers can adopt to substitutes for gasoline . This would

include taking public transportation. Studies have reported that consumers do not
easily find substitutes for gasoline, and that prices must increase significantly to cause

even a relatively small decrease in the quantity of gasoline consumers want.

Gasoline is an inelastic demand , better explained by a “situation in which a price change leads

to a less than proportionate change in quantity demanded.” ( Inforuge )

Generally, the price of a commodity, such as gasoline, reflects producers’ costs and

consumers’ willingness to pay. Gasoline prices rise if it costs more to produce and

supply gasoline, or if people want to buy more gasoline at the current price when

demand is greater than supply. Gasoline prices fall if it costs less to produce and supply

gasoline, or if people wish to buy less gasoline at the current price – that is, when supply
is greater than demand. Gasoline prices will stop rising or falling when they reach the

price at which the quantity consumers demand matches the quantity that producers will
supply.

how consumers respond to price changes will affect how high prices rise and how low
they fall. Limited substitutes for gasoline restrict the options available to consumers to

respond to price increases. That gasoline consumers typically do not reduce their

purchases substantially in response to price increases makes them vulnerable to

substantial price increases

how producers respond to price changes will affect how high prices rise and how low

they fall. In general, when there is not enough of a product to meet consumers’ demands

at current prices, higher prices will signal a potential profit opportunity and may bring

additional supply into the market. How high prices have to be to bring in additional

supply will depend on how costly it is for producers to expand output.

In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?

For commodities such as coffee, oranges and wheat, the effect of climatic conditions

can exert a great influence on market supply. Good weather will produce a better

harvest and will increase supply. Bad weather conditions will lead to a poorer

harvest, lower yields and therefore a decrease in supply.

Changes in climate can therefore have an effect on prices for agricultural goods such

as oranges. Commodities such as oranges are often used as ingredients in the

production of other products, a change in the supply of one can affect the supply

and price of another product. Higher orange prices for example can lead to an

increase in the price of orange drinks. These increased costs always funnel down to

higher orange smoothies in shops and cafes.

In the case of government intervention in the market, there is always a trade-off,

with positive and negative effects. For example, a price ceiling may cause a

shortage, but it will also enable a certain portion of the population to purchase a

product that they couldn't afford at market costs. Economic shortages are

generally seen as hidden. These factors can contribute to a...
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