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Supply and Demand and New Price Equilibrium Essay

In the marketplace fluctuations in the supply and demand affect the price of the gasoline and everyone can see the result of that volatility at the pump as the gas price fluctuates accordingly. When demand for the gas is high retailers raise prices and when demand is low – the prices are driven down.

As an example, one can observe that when in need for gas the intersection that has several gas stations would have the same or similar pricing for gas because the supply is high and the prices are contained by competition, however, several miles away where there is only one gas station in the surrounding area and the demand for gas is high but the competition is low –the retailer can set a higher price and the price will be driven up. Another factor affecting the price of gasoline is the price of the crude oil – the raw material that the gas is produced from.

On the marketplace many factors can affect the price of the crude oil and the gasoline that is produces from it -some of which are: * Political tensions in the countries where the majority of the oil is produced * Individual States environmental requirements. As complying with regulations and different oil processing techniques add to the cost of production and the end-product. “There is currently 18 different gasoline formulas produces for the different regions of the country” 1 * Each gallon of gasoline sold at the pump is subject to numerous taxes and fees that vary with each state, thus adding to the price of the gasoline. Regulatory steps to reduce air pollution while producing the end-product also influence gasoline markets and price.

* Competition contains the prices in the areas with abundance of suppliers, as supply is high. * Ethical views of the consumers affect pricing of the product as in the case of British Petroleum (BP)when the demand temporarily dropped due to the crude oil spillage in the ocean and ‘delayed or inappropriate’ handling of the spillage clean-up by the company in the eyes of the consumers. Negative consumer’s views towards the company shifted demand as many consumers boycotted the BP and purchased gas from the competitors.

With fallen demand the prices were driven down. * National disasters affect gas prices as well because of the temporary disruption of supply. After hurricanes Katrina and Rita the demand grew while supply dropped. This occurred because the ability to move crude oil and other processing components necessary for the production of gas was disrupted due to the disastrous conditions of the region and inability to move supply from region to region . The production flow was disrupted thus affecting supply. Short supply and unchanged demand escalated prices and lower quantity.

The variation in price of the end product is directly related to the fluctuations of supply and demand both of which are affected by many factors from such as a price of the raw materials, cost of production, competition, politics and the acts of nature. As all of those factors are in constant state of volatility so is the supply and demand, which would continue to make gas price highly volatile. Chapter 8, question 14. Product cost declines by $5 . Describe the process of reaching new equilibrium. Market price is determined by fluctuations of supply and demand.

The equilibrium price is the price at which the producers produce and supply adequate quantity of the product to satisfy the quantity currently demanded by consumers (Quantity supplied=Quantity demanded). When the company earns normal profit it means that it makes base profit to maintain business. Once the production technology improves and the average total cost of the unit produced decline by $5 it means that it costs $5 less to produce a unit of the product and that the profit of such product increased by $5 pushing the profit above the normal. Once other producers adopt new cost-saving technology the supply will increase.

To achieve new price equilibrium the demand has to increase at which point the price will go down. A reduction in production costs shifts the firm’s cost down and both average total cost and marginal cost curves shift down. The new long term equilibrium will be achieved when the industry output will rise and the price will fall by the amount of the reduction in the production costs ($5). 4 Chapter 5 question 17. Potato vs. computer chip rise in demand and short term economic outcome. When demand increases for potato and computer chips the producers are much quicker to respond to the manufacturing of potato chips as oppose to computer chips.

This is because potato chips are much simpler product to manufacture and the costs associated with the production of the product are less expensive. The raw materials- potatoes can be easily grown imported or pulled from the production of other product (such as mash potatoes or French fries). The equipment and labor is also cheaper than in the production of computer chips. To increase supply of the computer chips manufacturers need to obtain more technologically advanced equipment, import parts and materials that are more complicated (electronics) and utilize professional workers which are a greater cost of labor.

Because the industry is slower to respond to the increase of supply for the computer chips the price will rise for the short run until the producers catch up and supply increases. In the short run both products will increase price due to the temporary shortage of supply, however once supply increases the price will go down. As explained above the supply increase will take linger for computer chips due to the higher complexity of the product manufacturing and the cost associated with production.

In the long run increased demand will put pressure on the market for increased competition and expansion of the current industry. New firms may enter the market. Existing firms will increase production. Both manufacturers that produce potato and computer chips will need to stay competitive to maintain market share and deliver high quality product and maintain low prices. In the long run the lower prices could be achieved by attempting to lower the manufacturing cost either through advancement in technology or reducing labor/raw material or other product manufacturing cost.


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