Why Does the Price of Gas Fluctuate so Much: Why Do Prices Go Up When They Should Come Down and Down When Factors Seem to Push Prices Up?

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October 14, 2010

Why does the price of gas fluctuate so much: Why do prices go up when they should come down and down when factors seem to push prices up?

The price of gas is a consumer demanded market product. Consumers tend to make purchase decisions based on price. Economic Supply and Demand models can explain how prices are determined.

In economic principles, the Law of Demand states that, holding everything else constant, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa. The Law of Supply states that, holding everything else constant, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa. The economic theorem is that in a free market, supply and demand will establish point of equilibrium for price and quantity. Increases in price tend to increase quantity supplied and decrease quantity demanded. Decreases in price have the opposite effect. Increases in supply or decreases in demand tend to reduce price, while decreases in supply or increases in demand tend to increase price.

When discussing demand we are considering not so much what consumers want to buy as much as what they are willing and able to buy.

Additionally, in the short run, there are four leading components of gasoline costs - crude oil, taxes, refining, and distribution and marketing. Other factors to consider are:

1.The Organization of Petroleum Exporting Countries is a cartel made up of 14 countries, whose oil ministers meet periodically to manipulate supply and control prices. (1973 oil embargo)

2.Proximity to refineries, pipelines, and bulk storage terminals influences gasoline prices. At the retail level, prices are influenced by dealer costs, traffic patterns, and dealer supply sources.

3.Sellers are not required to price their goods and services based on what it costs to acquire them, plus a...
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