Adaptedfrom the excel sheets:
Figure1: Gas Stations in Houston, Texas.
Figure2: Price Vs Supply Curve
Figure3: Price Vs. Quantity Demanded
Figure4: Price vs. Demand & Supply Curves
Accordingto the US Energy Information Administration (2016), the currentmid-range average fuel price is $2.5 per gallon. As evident above,the average (mean) price per gallon is $2.11. The prices in our area(Houston, Texas) are, therefore, lower than the current nationalaverage.
Inelastic demand change in price leads to a proportional change inquantity demanded while in inelastic demand, the percentage change inprice does not result in a proportional change in the quantitydemanded. In inelastic demand, the price remains fairly constantdespite the change in quantity. The data above shows that the demandfor fuel in Houston, Texas is relatively elastic as it changes with achange in demand. In addition to elastic and inelastic demand isunitary elastic demand where proportional percentage change inquantity causes an equal proportional percentage change price(Camereretal.,2011).
Changein the consumer income can lead to a change in gasoline prices inthis state. For instance, if personal income taxes for individuals inTexas reduce, their income will increase hence consumers will havemore at their disposal (Arnold& Straten., (2012).The demand for gas in this state will increase leading to aproportional increase in the prices of gasoline. Customers have atendency to change their tastes and choice. Gasoline companies canadvertise their products this may attract new consumers for gas inTexas. The new consumers increase the demand for gas in this state,thus trigger the price which would accelerate proportionately.However, if the customer’s preferences were not to be for gas, thedemand for gasoline reduces thus its price would decrease.
Anadditional factor that influences the proportional change of quantitydemanded to a change in price is nature of the commodity. When acommodity’s necessity is relatively high, its demand is relativelyhigh unlike the demand for commodities that less necessary (Camereretal.,2011).The availability of substitutes also influences the elasticity ofdemand. In case gasoline has substitutes when the demand for thesesubstitutes’ increases there is a proportional decrease in thedemand for fuel leading to a crash in the price of gasoline. Butsuppose the demand for fuel substitute decrease, there will be aproportional increase in the demand for gasoline. Hence its pricewould increase. Another factor that will affect elasticity demand,it’s the determination whether fuel is a necessity or a luxury. Asa luxury, the demand elasticity will be high, and it will lower if itis a necessity. However, according to recent studies done, gasolineis considered a basic need hence its demand elasticity will berelatively low (Arnold& Straten., (2012).
Elasticsupply implies that a percentage change in the price of a commodityleads to a proportional percentage change in price. Supply is said tobe inelastic when the percentage change in price does not result in aproportional change in quantity. The elasticity of supply isdetermined by producers, in the above case, the gas stations are thesuppliers. The cost of production significantly affects theelasticity of supply this will reduce the quantity supplied inHouston by the gas stations. The price of oil will increase in thiscity. Other factors might affect the elasticity of oil supplychanges in taxes and subsidies levied on gasoline and changes intechnology used in oil exploration. In case the taxes increase theelasticity of fuel supply will be low due to increased costs(Camerer etal.,2011).
Theprices of oil in this new location will be the same. This is becausethe market forces of demand and supply will determine the marketprice (Arnold& Straten., (2012).The new gas station will adhere to the price set by the marketforces. If the new gas station’s management decides to sell at alower cost, it will suffer loss. In case it sells the gasoline at ahigher price it will lose customers. The gas market can be describedas a monopolistic market since it has a few sellers and many buyers,this being the case the price of the commodity cannot be determinedby a single seller rather by the market forces only. In somesituations, the sellers will determine the prices of the market. Ithelps in creating fair competition in the market.
Theprice of the commodity can remain relatively the same if the gasstation has the same supplier. Suppose this happens to be the case,the prices of oil will be in range with other gas station. For thisto happen the retailer has to be branded by a particular refinerycompany. The branded retailer pay a fee to companies for using theirname which will be agreed upon by the contract signed. In case theretailer is unbranded, he can purchase from other suppliers at theset market price (Arnold& Straten, 2012).
Arnold,I. J., & Straten, J. T. (2012). Motivation and math skills asdeterminants of first-year performance in economics. TheJournal of Economic Education,43(1),33-47.
Camerer,C. F., Loewenstein, G., & Rabin, M. (Eds.). (2011). Advancesin behavioral economics.Princeton University Press.