Gasoline Demand and Supply - Essay Example

Gasoline Economics (A). Gasoline demand and supply (and equilibrium) The demand for and the supply of gasoline in the market are determined bysome special factors. For example demand is governed by the price of gasoline, the availability of substitutes, price of those substitutes, geographical proximity to the place where substitutes are available, incomes of individuals, prices of automobiles, government taxes on gasoline and Supply constraints such as the availability of oil and gasoline deposits and the rate that new deposits are being discovered, the relative cost of developing such fields and bringing them up to modern supply standards, the government policy on new energy fields and other supply constraints such as rising cost of technology and monopoly power and its regulation (Holdich, & Chianelli, 2008). Equilibrium price is determined more or less by some of the same above factors in addition to the level of supply and the elasticity of supply. In other words the supply of gasoline is relatively inelastic. According to the above diagram, the positive in demand curve from D1 to D2 will result in increasing in price (P) and quantity (Q) of the gasoline. As a result the supply curve will shift to the right from S1 to S2. Equilibrium is the point where the quantity demanded equals the quantity supplied, thus there's no surplus of goods and no shortage of goods. Initially, E1 is the equilibrium point and due to the increase in demand, equilibrium shows at E2. However after the demand increase supply will decrease and equilibrium point shows at E3. Figure 1: Demand for and Supply of gasoline According to the above diagram, the positive shift in demand curve from D1 to D2 will result in an increase in price (P) and quantity (Q) of the gasoline. As a result the supply curve Source: Review of Economics and Statistics, 57(4), 502-07 According to the above diagram, the positive in demand curve from D1 to D2 will result in increasing in price (P) and quantity (Q) of the gasoline. As a result the supply curve will shift to the right from S1 to S2. Equilibrium is the point where the quantity demanded equals the quantity supplied, thus there's no surplus of goods and no shortage of goods. Initially, E1 is the equilibrium point and due to the increase in demand, equilibrium shows at E2. However after the demand increase supply will decrease and equilibrium point shows at E3. Suppliers adopt their own strategies in order to meet contingency demand by consumers. As a result suppliers tend to change their strategy according to the shifts in demand (Comnor, & Jon, 2001). Assuming a greater degree of pressure on supplier networks coming from greater market demand, suppliers would up their stake in the ultimate outcomes of the corporate strategy and business policy. This is the inevitable result of growing power of big Gasoline organizations becoming more and more independent on to expand business. (B) Consumer demand and behavior - related to Gasoline Consumers are very important for the business organization in determining its corporate strategy. For example customers can either make or break a business organization on the basis of demand. The business organization depends on customers' perceptive behavior to such an extent that the former has very little freedom in deciding the corporate strategy and production policy in any other possible way. The Gasoline prices have a big impact on consumer behavior. Thus consumers are not very responsive with their demand related to changes in the gasoline prices. As a result of rising gasoline prices consumers have been forced to cut down on their other needs and wants needed for their day today life. It also reduces savings and real income growth and other forms of consumption such as entertainment, eating out, electronic items, and vacations. Thus that the percentage of income set apart for gas and oil is inversely proportional to income. That is the less a person earns the higher the percentage set apart for gasoline. In fact rising gasoline prices have tremendous impact on the standard of living among the US consumers in particular and many gasoline consumers are adopting discretionary spending habits and other tactics to minimize the financial burden of rising gasoline prices. However increase in gasoline price in larger amount will reduce demand for the gasoline quantity in small amount (Espey, 1998). Especially, demand for the gasoline appears to be inelastic in the short run, because it is very difficult to reduce the gasoline consumption within a shorter period of time. Thus increase in gasoline prices has not changed the rate of gasoline consumption due to the fact that the population growth, technological change, residential development and job locations. (C) Gasoline - Competition, can it be managed Competitors play a very important role in the corporate strategy and policy planning environments of the business organization. There can be seen a huge competition among the Gasoline Companies in the industry due to the fact that market is dominating by a small number of large firms and also greater number of small Gasoline firms. For instance depending on the structure of the gasoline market structure, competitors constantly change their own strategy in order to remain competitive against other rivals (Hastings, 2004). Thus the fluidity of the market environment and the internal organizational setup invariably influence the competitive strategy of the Gasoline. These competitive pressures acquire a new dimension against the backdrop of the evolving modern environmental changes. With a four to five firm concentration ratio of almost 80% of the total market share and the rest being supplied by a number of smaller suppliers, the gasoline market is highly skewed in favor of monopoly tendency. Competitors have probably the greatest impact on the market-led outcomes and strategy of gasoline sellers due to the dichotomous policy framework associated with competition and the expansion. Competitive pressures force gasoline sellers to expand the scale of operations beyond their immediate market environment (Kaufmann, & Cleveland, 2001). However rather than the scale related economies what matters is the strategic process that has to be adopted in the strategic policy making environment. Recent developments in the sphere of gasoline market competition in the US show as to how far regulatory requirements could affect competition related outcomes. Thus a variety of gasoline sellers in the economy have made a persistent effort to reorient the strategy towards meeting these new challenges. (D) Gasoline - Demand elasticity Since elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price, incomes and/or prices of related products such as substitutes and complements. In fact gasoline price plays a pivotal role in determining the demand for the gasoline (Campbell, 1996). Thus the demand for the gasoline is inelastic (i.e. price inelastic). In the first instance equilibrium demand for gasoline climbs is determined by a number of demand factors, in other words the demand for gasoline is relatively inelastic. Basically demand for the Gasoline depends on the population, fuel efficiency of cars, income and the number of miles driven by the US consumers. Thus demand changes for the Gasoline will responsible for the relative price changes. There can be identify three different elasticties of demand, i.e. price elasticity of demand (PED), income elasticity of demand (YED) and cross elasticity of demand (XED) for the gasoline. PED is shown to be inelastic in gasoline probably due to the fact that as the price increases there is a lesser possibility that consumers might reduce their demand by a still a lesser percentage than the percentage change in price (Ramsey, & Allen, 1975). However, YED is inelastic because a rise or fall in the consumer's income is not affect for them to change the demand for the Gasoline. Thus YED is relatively inelastic. On the other hand XED of gasoline is positive for substitutes and negative for complements. For example when the price of a substitute like electricity increases the demand for Gasoline also increases. When the price of a complement like cars increases the demand for Gasoline falls. The gasoline company's might require it to adopt a different pricing strategy like a market penetrating strategy in which the firm might charge a higher price for its Gasoline depending on the demand and the level of competition. Assuming that the price elasticity of demand for gasoline is lower (i.e. inelastic) the firm might be able to increase price and sustain a longer term survival in the US. (E) Gasoline - Market structure It is an oligopoly market structure dominated by small number of large firms and most of the firms lead the industry. According to the behavior of the oligopolistic market, firm has to face a kinked demand curve at the existing market price for its Gasoline (Paul, & Miljkovic, 2001). In this scenario suppliers do not have the tendency to increase the price, because other competitors in the industry would not follow the same pricing strategy. Therefore if one supplier decreases the price, others would not follow suit, because of that the below the kink demand curve is inelastic while above the kink is elastic. Kinked demand curves are similar to traditional demand curve and it is sloping downwardly and the firm's marginal revenue curve is discontinuous, since it has a gap at the kink. The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity. A price above the prevailing price the curve is relatively elastic and prices below the point the curve is relatively inelastic. Figure 2: The oligopoly market structure for gasoline Source: Resources and Energy, 13(3), 241-262. In oligopoly market it has a high degree of market concentration and it indicates that larger portion of the oligopoly market is owned by the leading gasoline firms of the particular country (Nevo, 1998). Thus big gasoline business firms can be regarded as a market leader in the gasoline market industry with serving c to the worldwide customers with a huge market share. Also there can be seen some small number of gasoline suppliers in the market having a little market share compared to the big gasoline market players in the industry. REFERENCES 1. Campbell, C. J. (1996). World oil: reserves, production, politics and prices. Norwegian Petroleum Society Special Publications, 6, 1-20. Link to the source: (books.google search engine based) 2. Comnor, W., & Jon, R. (2001).The costs of regulation: Branded Open Supply and Uniform Pricing of Gasoline. International journal of the Economics of Business, 10, 135-55. 3. Espey, M, (1998). Gasoline demand revisited: an international meta-analysis of elasticities. Energy Economics, 20(3), 273-295. 4. Hastings, J.S. (2004).Vertical relationships and competition in retail Gasoline markets: Empirical Evidence from Control changes in Southern California. American Economic Review, 94, 317-328. 5. Holdich, S. A., & Chianelli, R.R. (2008).Factors that will influence Oil & Gas Supply and Demand in the 21st Century. MRS Bulletin, 33. 6. Kaufmann, R., & Cleveland, C. (2001). Oil production in the lower 48 states: economic, geological, and institutional determinants. Energy Journal, 22, 27-49. Link to the source: (www.calameo.com/book search engine based ) 7. Nevo, A. (1998).Identification of the Oligopoly solution Concept in a Differentiated - Products Industry. Economics Letters. 59,391-95. Link to the source: (science direct.com search engine based) 8. Paul, R.J., & Miljkovic, D. (2001). Market integration in US gasoline markets. Applied Economics, 33(10), 1335-1340. Link to the source: (editorialexpress.com search engine based) 9. Ramsey, J., & Allen, B.T. (1975). An Analysis of Private and Commercial Demand for Gasoline. Review of Economics and Statistics, 57(4), 502-07. Link to the source: (stlousisfed.org search engine based) 10. Wirl, F. (1991). Energy demand and consumer price expectations: An empirical investigation of the consequences from the recent oil price collapse. Resources and Energy, 13(3), 241-262. Link to the source: (linkinghub.elsevier.com search engine based) Read More