Gas Price Elasticity
The Energy Information Administration of the Department of Energy began tracking weekly gasoline prices in 1990 by means of a survey of 800 service stations around the country. The average retail price for unleaded gasoline posted its fourth record high during the week of June 12, 2000, increasing 5 cents a gallon to an average of $1.681. The price at the pump is higher than the same period last year by 56 cents and has risen 16.2 cents over the past month (Anonymous, 2000).How far will it rise? What will consumers do about the dramatic increases that are occurring with the arrival of each shipment? Price elasticity of demand would indicate that demand will fall as prices continue to rise, which in turn should result in a reduction of prices and a subsequent increase in demand. Such may prove to be the case, but the scenario is an unlikely one. Prices have increased all over the country, but price increases in the Midwest have been even more dramatic than in other areas. Across the region, prices are averaging $1.874 for a gallon of unleaded, but that same product is well over $2 a gallon in many of the cities of the Midwest. Higher grades average $2.003 across the region, marking the first time that avera
William Berman is editor of Pump Price Report in Fairfax, Va., and retired energy director for the AAA, and says that consumers get "nervous" as gas prices rise. Conventional wisdom is that families indulge in "fewer weekend getaways and long driving vacations with the family" (Brodrick, 2000; p. 000215d), but there is evidence that such is not the case. Rather, Americans generally will not change travel plans unless gas is over $1.50 a gallon, which of course it is now (Brodrick, 2000). Gasoline generally is seen as a necessity. Going to a family reunion once a year may be an option, but going to work each day is not. There is also no option for landscaping businesses and farmers to defer purchase in response to price. Higher prices encourage conservation, but they do little to change anyone's way of living or working. Price increases are normal in the summer months as families pile into cars for the family vacation. This year, there was additional price pressures as the industry recovered from the hard winter in the Northeast and Asia continues to recover from it currency crisis-induced recession. As people in affected regions have more discretionary income, they spend greater portions of it on gasoline for their own cars (Brodrick, 2000). Sen. Richard Durbin, D-Ill. believes that the oil companies will reduce prices right away once the subpoenas begin to appear, and the country's vice president has mentioned that collusion may be behind the oil companies' huge profits this year (Hebert, 2000). The summer driving season always brings higher prices in response to heightened demand, but never to the extent seen this year. The retailer's price increase to the final consumer is between 4 and 8 cents a gallon, meaning that there is little option for the consumer to shop on price. Further, consolidation has been active in oil as in other industries. A different brand name does not signi
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Approximate Word count = 1286
Approximate Pages = 5 (250 words per page double spaced)
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