Factors affecting the price of Gasoline 4 pages

Business Economics – GM545

Academic Term: May 2012 Session

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Factors affecting the price of Gasoline:

It is an established fact that market forces of demand and supply are responsible for fluctuation in prices of commodities. Where demand is greater than supply, it is going to result in price hike i.e. An upward shift in the demand curve and vice versa.

Same principle governs the prices of gasoline at pumps and service stations. Where the retailer increases his prices, disregarding the competition, the demand of a gasoline at that particular pump will decline with business shifting to the competition. Where the demand reduces greatly, the retailer will further reduce his prices for customer retention.

Hence, it is competition in the retail industry which affects the prices greatly. This is the very reason why a gasoline station at a distant area or the one within the city shows price difference.

Another factor which may affect the prices of gasoline is the independent ownership of gasoline stations where the dealers are free to set their own prices.

Third noticeable factor for changes in gasoline prices is the change in the crude oil prices. Gasoline is provided to the local market after extraction from the crude oil. Where a change in international prices of crude oil is observed, result is a snowball effect and a change in gasoline price as well.

Fourth factor which is responsible for having an effect on gasoline price is individual state taxes. The taxes levied on gasoline vary as per state. And furthermore, states require different formulae for gasoline extraction. This difference in gasoline extraction formula and also change in various taxes and duties cause a difference in gasoline prices as per state e.g. In California, the price of gasoline includes a federal motor fuel excise tax, a California motor fuel excise tax, state and local sales taxes as well as other state and local fees totaling more than 66 cents a gallon.

After extraction, the gasoline is provided to the wholesalers for further distribution who charge their own markup on every gallon. When retailers receive this gasoline, they set the final prices after charging their own profit and a cost of doing the business.

Chapter 3, Question: 15

Considering George W. Bush’s decision of using ethanol instead of gasoline will result in prices of food over next few years. The main causes for change in prices are the greater acquisition of land to grow corn which will be reflected in the prices of the fuel. Furthermore, the obvious phenomenon of demand and supply will work and the increase demand in of corn and sugarcane etc. Which is required for manufacturing ethanol will result in prices. Thirdly, ethanol as fuel provides 20% less mileage as compared to gasoline. Thus, more refueling will be required and the transportation cost of these products will increase which will be added into main prices of food. Considering the emission of Carbonmonooxide by gasoline and ethanol per gallon, Ethanol takes the lead. Manufacturers have to take necessary measures for mitigating this effect as per Clean Air Act which requires further addition in cost of manufacturing (Goettemoeller, 2007). Therefore, further price of ethanol increases and so does the price of food.

Coming towards acute shortage of oranges in 2006, the result of this shortfall was disastrous. Florida is the nation’s major source of domestically-produced orange juice, with about 95% of the state’s crop squeezed. Domestic orange juice production has surpassed consumption only once in the past six years, according to the U.S.D.A (Sterk, 2010). When the orange sustained extreme damage in 2006, the demand and supply forces were already imbalanced, resulting in price increase. Secondly, the suppliers also held on to their stock which caused forced price hike. Therefore, in order to meet national demand, oranges were imported from Brazil. The cost of imported ones was higher than the domestically grown ones; therefore, an increase in price was obvious. All these factors lead to a tremendous price hike. This price increase didn’t limited to the raw oranges only but was also transmitted into products using citrus, which is obtained mainly from orange.

Chapter 8, Question 14

In the long-run, a perfectly competitive firm can adjust the amount it uses of all factor inputs, including those that are fixed in the short-run. For example, in the long-run, the firm can adjust the size of its factory. In making these adjustments, the firm will seek to minimize its long-run average total cost. If, in the short-run, the firm is operating below its minimum efficient scale and experiencing economies of scale, in the long-run it can adjust its use of factor inputs so as to increase its output to the minimum efficient scale level (Sowell, 2000).

When the firm is at equilibrium in a normal competitive market and is earning normal profits in long-run. The firm will have its marginal costs equals to its marginal revenues and will be earning no profits in the long-run (the marginal revenue, marginal cost and average cost curve in the long-run, will be intercepting each other at a common point indicating no profits). Where the cost of the firm decreases by 5 units due to technology, the firm will enjoy profits in the short-run. This profit is equals to the difference between marginal revenue (which is a straight line in the long — run) and long-run average total costs curve.

Where the firm enjoys profits in the short-run, it will increase its supply by the difference in order to enjoy economies of scale. In the long-run, the marginal cost per unit will decrease but so will the marginal revenue per unit as well. Hence, the firm will acquire new equilibrium with reduced average costs, marginal cost and marginal revenues.


Goettemoeller, J.A. (2007). Sustainable Ethanol: Biofuels, Biorefineries, Cellulosic Biomass, Flex-Fuel Vehicles, and Sustainable Farming for Energy Independence (Brief and comprehensive account of the history, evolution and future of ethanol). Prairie Oak Publishing, Maryville, Missouri. ISBN 978-0-9786293-0-4.

Sowell, T. (2000). Basic Economics: A Citizen’s Guide to the Economy

Sterk, R. (2010). Cold weather wreaks havoc on orange crop, markets

Orange juice futures volatile but large stocks limit upside, Retrieved from http://www.foodbusinessnews.net/Opinion/Ron%20Sterk/Cold%20weather%20wreaks%20havoc%20on%20orange%20crop%20markets.aspx

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