Price Elasticity Essay

1476 Words Jun 16th, 2011 6 Pages
Use the concepts of price elasticity of demand and elasticity of supply to explore and explain the large fluctuations in the retail price of gasoline over the last 3 years. Use price elasticity concepts to explore the accompanying closure of many gasoline retailers. Also, discuss the impact of cross-elasticity of demand.

According to various literatures petroleum is the single largest source of energy used in the United States. It is said that the USA uses two times more petroleum than either coal or natural gas and four times more than nuclear power or renewable energy sources. However, before petroleum can be used it is sent to a refinery where it is physically, thermally, and chemically separated into fractions and then converted
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Tea and Coffee can be considered substitutes. If prices of coffee rise to uncomfortable levels, coffee drinkers might switch to the cheaper alternative- tea. So rise in coffee prices might lead to increase in demand for tea.
The price of gasoline reflects the cost of production and the willingness of consumers to pay. Gasoline prices rise if it costs more to produce and supply gasoline, or if consumers wish to buy more gasoline at the current price – that is, when demand is greater than supply. Gasoline prices fall if it costs less to produce and supply gasoline, or if people wish to buy less gasoline at the current price – that is, when supply is greater than demand. Gasoline prices will stop rising or falling when they reach the price at which the quantity consumers demand matches the quantity that producers will supply.
How producers respond to price changes will affect how high prices rise and how low they fall. When there is not enough of a product to meet consumers’ demands at current prices, higher prices will signal a potential profit opportunity and may bring additional supply into the market. If consumers have many close substitutes for a particular good, a relatively small price increase will result in a relatively large reduction in how much they demand; However, gasoline have little or no substitutes so a relative increase in price has no

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