Supply and demand
May 24th, 2008 |I understand that I am to believe that the price of gas has gone up due to global demand. If this is the case then why can I buy as much gas as I want on just about any street corner in America? Isn’t it more likley that gas is $4 per gallon because people will pay that price without any significant change in consumption behavior? If you had a product that you could sell a quantity of 100 for $2 or a quantity of 95 for $4 what would you sell it for? Gas is the price it is because the oil and gas industry knows that you will pay it.
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9 Responses to “Supply and demand”
I think our Cat 6 economist Plan B is best equipped to discuss this.
it’s called inelastic demand, the qty purchased doesn’t change with changes in price…
I think you are partially correct. Gas isn’t as expensive intrinsically as we think. The weak dollar, brought on my deficit spending and fed action is as much to blame right now.
Demand actually is somewhat down right now, but consumers can only cut their consumption so much. They may cut out vacations and combine trips, but many still have to drive to work or for a living. That is to say gas has a somewhat inelastic demand curve.
The futures market.d
It’s boarderline criminal in my opinion.
According to CNN: Gas Prices in Europe -
Netherlands - $ 6.48
Norway - $ 6.27
Germany - $ 5.57
Italy - $ 5.96
Wadda we griping about again???
I believe demand is more than somewhat down… Yesterday’s front page article in the Times chose “sharply.” It also stated that we are on track to have the first down year of US demand for gasoline in 17. That’s longer than some young drivers have been alive.
If you figure that the dollar has halved in value since the current occupant took office and at that point gas was just cresting past a dollar a gallon… it really hasn’t risen that much. At least if your paycheck comes in Euros.
Demand has actually been declining somewhat in the past couple of years–and if we say that the oil companies will charge us X price because we are willing to pay it, remind me again why they were idiots and only charged us $1.35 not that long ago?
Reality is that as soon as prices for a product go above the marginal cost of producing it, people start moving to put that marginal supply into full production. If I’ve got oil on my property, there is not a blessed thing that Gulf, Shell, and Amoco can do to stop me from bringing it to market–except to drop their prices and make it unprofitable for me to do so.
Hence we have demand that is not completely inelastic (I’m riding more at $4/gallon!), and supply that is definitely not inelastic.
At least until Congress and OPEC types get involved.
Whoops! Late to the party.
What you’re describing, as others have noted above, is inelastic demand. It happens with a lot of goods, and it means that prices are particularly sensitive to shifts in supply.
The relationship it has to market power (oligopoly/cartels, monopoly) is that it does in fact make it more profitable for firms to raise prices over marginal cost.
The question is whether oil and gas sectors are perfectly competitive, and how far they are away from perfect competition. My half-informed guess is that they’re not perfectly competitive (as that would imply zero excess economic profits, which I don’t think has been the case), but they’re not far off.
My personal and professional opinion is that gas is not expensive enough. Gas is still too cheap. It should be taxed MORE with the proceeds going to reduce income taxes.
As for why you can buy as much gas as you want at a fixed price: You can’t. You can only buy a few thousand gallons. If you wanted to buy a LOT more, the price would increase. And that’s what we’re seeing. The world wants to buy a LOT more gas, so the price is increasing because it’s more expensive to produce a LOT more gas. Long dormant oil fields where I ride in SW Michigan are now pumping again. That’s expensive.