Gasoline prices are typically higher during summer, when a lot of people are on road trip....

Gasoline prices are typically higher during summer, when a lot of people are on road trip. Sam, who did not have any course in economic, says “gas companies just find any excuse to increase the price”. How does Sam’s perspective differ from that of economists who use the model of demand and supply?

Solutions

Expert Solution

Answer

The economists know what determines the price of a commodity.The market price of a commodity is determined by the demand and supply forces. The scarcity of the resources and hence the lower production sometimes limit the the supply of a commodity.The producers produce the commodities because they have demand. The demand for necessary commodities is unlimited. When the free interplay of demand and supply forces fix a price at which both the consumers and the producers or the suppliers are satisfied, that price is called an equilibrium price.When the market demand for a commodity is greater than the market supply of that commodity, the excess demand for that commodity or the shortage of supply arises in the market. The natural shortage of a commodity arises mainly due to the scarcity of the resources in an economy. The shortage of supply raises the market price of a commodity. Higher the demand, higher would be the price of a commodity.

The gasoline is one of the non-renewable scarce resources. During summer, when a lot of people are on road trip, raises the fuel demand for the car.As a result the demand for gasoline rises. Gasoline is very important or essential commodity whose supply is limited in the short-run. So a rise in the demand for gasoline raises the price of gasoline. In the short-run the price elasticity of the demand for gasoline is inelastic because its close substitutes are very limited in the short-run.So the rise in the price of the gasoline won't have a large impact on the demand for the gasoline in the short-run.

Now, a person like Sam, who did not have any course in Economics, would have a different aspect on the price rise of the gasoline. Sam says “gas companies just find any excuse to increase the price”. Gasoline is an important and essential commodity.Sam has noticed that the rise in price has not impacted a lot on the demand for gasoline. So when the price of gasoline rises, the person like Sam would think that the gas companies are high profit achiever.So they find any excuse to increase the price of gasoline.As the gasoline is nearly price-insensitive, so the gas companies would take advantage of it and would raise the price of gasoline intentionally.

So an economist would view the rise of gasoline price from the scarcity of the resource perspective but a person like Sam, who didn't have any course in Economics, would view it from the gas companies' profit escalation perspective.

_______________________________________________________________

Rahul Sunny answered 10 months ago

Next > < Previous

Related Solutions

Beach resorts typically raise their prices during the summer months and yet more people book rooms at those times.

Beach resorts typically raise their prices during the summer months and yet more people book rooms at those times. Is this a violation of the law of demand? If so, why? If not, how would you be able to explain what is happening with a supply and demand model (i.e. please explain in words which curve(s) might be changing)?

People argue that a higher tax on gasoline is not necessarily an increase in gasoline taxes....

People argue that a higher tax on gasoline is not necessarily an increase in gasoline taxes. Explain if you agree or disagree with this statement. I need a thorough (at least) two or three paragraphs answer.

Higher unemployment caused by the recession and higher gasoline prices have contributed to a substantial reduction...

Higher unemployment caused by the recession and higher gasoline prices have contributed to a substantial reduction during 2008 in the number of vehicles on roads, bridges, and in tunnels. According to The Wall Street Journal (April 28, 2009), the reduction in demand for toll bridge and tunnel crossing created a serious revenue problem for many cities. In New York, the number of vehicles traveling across bridges and through tunnels fell from 23.6 million in January 2008 to 21.9 million in...

On a trip home during the summer break, you pay your Uncle Davea visit at...

On a trip home during the summer break, you pay your Uncle Dave a visit at his record store. When you walk in, you notice there is not one single customer. “I have run this store since the 1980s,” Uncle Dave says with a sigh. “We were the first store in this whole town to sell compact discs! But now, it feels like we’re at least a decade or two behind the times. No one buys records anymore—or even CDs!...

Emma is taking a well deserved vacation trip in Florida during the summer. She notices that...

Emma is taking a well deserved vacation trip in Florida during the summer. She notices that although temperatures are hot, they are usually not higher than 95F. However, A few days earlier when she was in the dessert in Arizona, temperatures rose far above this. Why does this happens?

Suppose the average price of gasoline for a city during summer follows an uniform distribution with...

Suppose the average price of gasoline for a city during summer follows an uniform distribution with a lower bound of $3.50 per gallon and an upper bound of $3.80 per gallon? Show all calculation with formula and interpret your result for each problem to get full credit. Compute the mean and standard deviation. What is the probability a randomly chosen gas station charges more than $3.70 per gallon? What is the probability a randomly chosen gas station charges less than...

Inflation rate during the 1970s was much higher than most people had expected when the decade...

Inflation rate during the 1970s was much higher than most people had expected when the decade began. Use the concept of real interest rate and explain: a) How did this unexpectedly high inflation affect homeowners who obtained fixed-rate mortgages during the 1960s? b) How did it affect the banks that lend the money during the 1960s?

During Covid, a lot of people are working at home, away from the office. As a...

During Covid, a lot of people are working at home, away from the office. As a result, many residents of Toronto have sold their homes and moved out of Toronto to other parts of Ontario (up north) and other parts of Canada such as New Brunswick, where housing prices are cheaper. Question: Use Marginal Analysis to explain this observed behavior. Please provide examples in your answer...

During the semester, we talked a lot of impact of People, Process and Technology. All of...

During the semester, we talked a lot of impact of People, Process and Technology. All of the above come together to either help Enterprises thrive in business or vanish. One important point of intersection is the relationship between the Enterprise Structure and Culture. There is a general assumption that the Enterprise structure and Enterprise culture impact each other. In a domain of your choice, with examples, First, outline the mechanism through which Enterprise Culture impacts the design of Enterprise Structure,...

In many of the product markets discussed, the higher prices during “high demand” times also reflect...

In many of the product markets discussed, the higher prices during “high demand” times also reflect an increased cost or difficulty supplying the product during those times due to capacity constraints or higher input prices. Provide at least three examples and briefly discuss why costs might go up during “high demand” periods. (Recall that capacity constraints can be thought of as a very high MC above some output level!) Can you think of any examples of markets where time-varying prices...

Subjects