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?

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.

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Rahul Sunny answered 1 year ago

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