The cost of crude oil and supply and demand factors affect retail gasoline prices. The demand for oil is growing domestically in the United States and globally, but production and supply are limited. Ongoing discussions on offshore drilling emphasize the challenge of managing gas prices.
The increase in gas prices is affected by global supply and demand, which is influenced by crude oil prices. This rise is especially noticeable during periods of rapid development in countries. Furthermore, natural disasters and political conflicts can also impact gas prices as they affect major oil producing regions such as Saudi Arabia, Iran, and Iraq. The Organization of Petroleum Exporting Countries (OPEC) has a crucial role in determining crude oil prices due to its members’ substantial contribution to global oil production (over 40%) and their ownership of more than two-thirds of the world’s estimated oil reserves.
States further from the Gulf Coast, where around 50% of the US’s gasoline is made, face higher oil prices because they have to spend more money on transporting fuel from refineries. The West Coast and Rocky Mountain regions typically experience higher fuel costs because oil has to travel a greater distance.
The presence of multiple distribution points affects gas prices as areas with several distribution points compete to attract customers. Therefore, these areas consistently strive to lower or match gas prices by a slight margin. In larger cities like Chicago, the prices are higher due to the tax rate in Illinois. Consequently, some residents of Illinois choose to travel to neighboring cities or states that have lower taxes and more favorable gas prices. For instance, Hammond, IN currently pays $3.62 per gallon while the average gas price in the Chicago area is $4.09 per gallon. The current national average price per gallon in the USA is $3.58.
When a market is in equilibrium, it stays balanced unless there is an external factor causing a change. However, if determinants change and cause shifts in the supply or demand curve, the equilibrium also changes, resulting in a new price and/or output equilibrium. In Starbucks’ situation, the introduction of their premium blend increases demand for their products. This upward shift disrupts the equilibrium due to Starbucks’ new blend. If consumers respond positively to this premium blend, it may lead to a higher price and quantity at equilibrium (Stone, 2011).
Due to a severe freeze in Brazil, the availability of premium coffee will be greatly impacted, thus leading to a decrease in supply and causing the supply curve to shift towards the left. This will consequently result in an upward movement of the price for high-quality coffee. However, if the freeze’s influence on the supply of premium coffee subsides, equilibrium can be achieved by increasing quantity and fostering competition.
Potato chip manufacturers need to respond quickly to the rising demand, assuming potato crops have had a good yield. In contrast, computer chip manufacturers will require more time to meet the increased demand due to the intricate process involved in creating computer chips. Both manufacturers will extend their production schedules by employing additional personnel, acquiring more equipment, and employing new distribution methods. The computer chip manufacturer might collaborate with a third-party manufacturer to expedite chip production. Furthermore, both manufacturers will face heightened competition due to the surge in demand.
To avoid losing market share and maintain consumer demand, both manufacturers must promptly fulfill consumer demands (Stone, 2011). To cover the expenses of meeting heightened production timelines and capitalize on profit opportunities stemming from increased demand, prices may escalate with rising demand. Both manufacturers will endeavor to formulate an adaptable strategy for potential future increases in demand. This strategy could encompass enlarging potato crops or discovering long-term storage solutions for the potato manufacturer. Additionally, they might enhance the utilization of computer-operated processes while diminishing dependence on human labor by employing additional temporary workers or establishing a fresh production line.
Reference
- Stone, G. (2011). Core Economics (1st ed). Worth Publishers. Retrieved from http://devry.vitalsource.com/books/9781464107627/page/51
- Retrieved from http://blog.allstate.com/battle-at-the-pump-fighting- fluctuating-gas-prices/
- Retrieved from www.gasbuddy.com
