Question

4.If the average price of gasoline is $1.25 per litre in your town, and gasoline is a perfectly competitive market, explain what might happened and why in your town, if the price of gas dropped to $.50 overnight? What if it jumped up to $10.00 per litre overnight?

Answer 1

What might happened and why in your town, if the price of gas dropped to $.50 overnight?

1. Single seller cannot change the price in perfectly competitive market, but the whole association (group) of seller together can do so. The entire group of sellers may have dropped the price to less than half.
2. Drop on government taxes on gasoline may be another reason of fall in prices.
3. EXCESS SUPPLY of gasoline from the producers' side is another reason. Perfectly competitive market cannot sell the entire output on the existing price of $ 1.25, therefore in order to make consumers consume more gasoline, prices would have dropped.
4. There could seasonal changes as well. For instance, families do not travel outdoor when semester exams of children are on. In such seasons demand fall drastically and there creates a situation of excess supply. In order to CLEAR THE MARKET, prices have to be dropped.
5. Over-production by oil-rigs is another reason for that.

What if it jumped up to $10.00 per litre overnight?

1. A jump from $1.25 to $10 is too steep.
2. Accute shortage in supply from the oil rigs.
3. Artificial scarcity created by the oil-economies like middle-east, etc.
4. Major civil disturbance in the country. For checking the same, government has levied abnormal taxes on gasoline and made it too expansive for a short period of time till normalcy is restored.
5. Severe crises on balance of payment account. Shortage of foreing exchange reserves which are necessary to fund our imports, may be another reason for too much rise in the gas prices. You see many countries around the world do not produce crude oil of their own. They have to import it all and pay it off in foreign exchange.