GM545- Business Economics
Spring II Session 2010
The price of gasoline is definitely impacted by the principle of supply and demand.
Consumers today use more oil causing an increase in the demand for oil, thus
causing the price of gas to increase for consumers. (Consumers, 2008). There is usually
an increase in demand between May and September which increases the price consumers
pay during the summer driving season. Since there is usually a decline in the demand for
gas during the winter months, the price tends to also decrease during this season.
Although demand plays an integral role in gas prices, research shows that there are four
main factors that influence the price of gas consumers pay at the pump.
The cost of crude oil is a factor which accounts for 55% of the price of gas.
(Accounts, 2010). OPEC, an organization of 12 oil producing countries, produce
approximately 46% of the world’s oil, was formed to regulate supply and to some
extent, the price of oil. (OPEC, 2010). How much crude oil is being bought and sold
for is attributed to 50% of the price of gas consumers pay. (Crude, 2010). The less crude
oil produced, the price of gas will increase. A higher supply produced, there tends to be a
decrease in the price of gas. Refining costs, cost of distribution, and taxes are also major
factors that influence the price of gas. Federal, state, and local taxes can sometimes
account for 19% of the price consumers pay ; however, this number changes continuously
and is based on the price of crude oil. (Federal, 2010). Taxes and distribution generally
influence approximately 45% of gas prices. (Taxes, 2010) Since distribution and taxes are
usually stable, the daily change in gas prices basically reflects the fluctuation in oil
prices. Occasionally, distribution lines are disrupted by weather related or natural
disasters, or are down for maintenance, which can also create an increase in the price
consumers pay at the pump, even if oil prices are actually down.
Chapter 8: Question 11
The theory of competition rests on the following assumptions. (Theory, 2008).
1. Competitive markets have many buyers and sellers
2. No barriers to market entry/exit
3. No control over price
4. No long run economic profits
The Internet has helped create more competitive markets because it has created a
technological advantage that clearly supports the theory of competition. The Internet has
provided a means to improve visibility of all businesses regardless of size and type to sell
a product or provide a service through a fair an equitable channel. The Internet has
created and caused the .com industry to flourish over the years which has thus created an
avenue for the establishment of many new businesses to enter the market to compete.
Businesses can improve their global competitiveness and productivity with more efficient
electronic transactions processing and instant access to information. The Internet has
provided businesses with new tools and added convenience that can increase competitive
advantage. It has provided consumers with access to products and services 24 hours per
day/7 days a week with the ability to shop around and do more price comparisons for the
best deal without leaving their home. Many businesses offer lowest price guarantee
where they will match or beat a competitor’s price and will send email notifications to
advise when the price has dropped. The Internet has also created a channel for
ground breaking innovative businesses such as Ebay and Priceline to enter the market
with enormous success. The emergence of the Internet has forever changed the way of
doing business and with the continuous enhancements and growth in technology, it will
continue to create more competitive markets....
References: Worldwide Web. www.factsonfuel.org. Retrieved May 3, 2010.
Worldwide Web. www.financialnut.com/simp-economics-demand-and-supply-affect- gas-prices. Retrieved May 3, 2010.
Stone, Gerald W. (2008). Core Economics. New York, NY: Worth
Worldwide Web. http://socyberty.com/issues. Retrieved May 7, 2010.
Worldwide Web. www.sparknotes.com/economics. Retrieved May 7, 2010.
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