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Keller Gm545 Course Project1 - Keller Gm545 Course Project...

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Keller Gm545 Course Project - Part 1 Keller Graduate School of Management Business Economics GM545 Online Graduate Course Summer Session A, July 2010 Project Part 1 16 July 2010 Exercise 1: Everyone’s Gasoline Problem One of the most classic application examples of supply and demand is the gas/petroleum market. Gas prices are established through basic supply and demand, when demand rises and supply falls, prices rise quickly; and just the converse when supply increases and demand falls, prices decrease (although rare in modern day occurrence). Fluctuations in gas prices are also the result of multiple industry factors including uncertainty in the economy, economic demands for oil and the price per barrel of oil. Speculation and forecasting also lend a hand in continuously moving market equilibrium. Intermediaries in the market, such as gas wholesalers, can also have a profound impact on the market through price increases, charging higher premiums for service and handling. Multiple influences affect the price of gas, some direct, others indirect. One such case of an indirect influence on price is natural disasters. The hurricanes in the Gulf of Mexico region have impacted gas prices on more than one occasion, more recently Hurricane Katrina. The devastation that rocked the nation impacted the supplies of crude oil and gas productions leading to a shortage. This shortage was felt almost immediately as prices per gallon of gas skyrocketed. (Chevron Corporation 2005-2008) Government regulations and taxation also impact the price of gas to the consumer. National, state, regional and local government each has levied a tax on gas. These taxes impact the price per gallon as it varies from area to area. States and cities with higher taxes naturally quite often have higher prices on gas. (API 2010) Price elasticity is a measurement of the market’s sensitivity to fluctuations in the pricing of a particular product or service. (Stone 2008) Products that are considered necessities, such as grocery items, prescription drugs, electricity, gasoline, and so forth, have a relatively inelastic demand. These products typically experience little change in demand as income rises or falls or prices change. “An inelastically demanded product, …, can absorb the price increase due to a tax without much impact on quantity demanded. Producers can therefore pass most of the burden for such taxes on to consumers…” (Stone 2008) As an inelastic demand, gas can and does carry the full weight of taxes in the price per gallon and this is passed along to the consumer. Seasonality can have an impact on both the supply and the demand sides. For example in the summer months people are more likely to take vacations or longer trips, bringing the demand for gas up, but just the same the gas suppliers and retailers realize this trend and increase prices accordingly to bring the market into equilibrium. Another impact on
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demand is the loss of jobs in the current economy. With less available spending money
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