Business Economics - GM545 Academic Term: May Term Paper

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Business Economics - GM545

Academic Term: May 2012 Session

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Factors affecting the price of Gasoline:

It is an established fact that market forces of demand and supply are responsible for fluctuation in prices of commodities. Where demand is greater than supply, it is going to result in price hike i.e. An upward shift in the demand curve and vice versa.

Same principle governs the prices of gasoline at pumps and service stations. Where the retailer increases his prices, disregarding the competition, the demand of a gasoline at that particular pump will decline with business shifting to the competition. Where the demand reduces greatly, the retailer will further reduce his prices for customer retention.

Hence, it is competition in the retail industry which affects the prices greatly. This is the very reason why a gasoline station at a distant area or the one within the city shows price difference.

Another factor which may affect the prices of gasoline is the independent ownership of gasoline stations where the dealers are free to set their own prices.

Third noticeable factor for changes in gasoline prices is the change in the crude oil prices. Gasoline is provided to the local market after extraction from the crude oil. Where a change in international prices of crude oil is observed, result is a snowball effect and a change in gasoline price as well.

Fourth factor which is responsible for having an effect on gasoline price is individual state taxes. The taxes levied on gasoline vary as per state. And furthermore, states require different formulae for gasoline extraction.

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This difference in gasoline extraction formula and also change in various taxes and duties cause a difference in gasoline prices as per state e.g. In California, the price of gasoline includes a federal motor fuel excise tax, a California motor fuel excise tax, state and local sales taxes as well as other state and local fees totaling more than 66 cents a gallon.

After extraction, the gasoline is provided to the wholesalers for further distribution who charge their own markup on every gallon. When retailers receive this gasoline, they set the final prices after charging their own profit and a cost of doing the business.

Chapter 3, Question: 15

Considering George W. Bush's decision of using ethanol instead of gasoline will result in prices of food over next few years. The main causes for change in prices are the greater acquisition of land to grow corn which will be reflected in the prices of the fuel. Furthermore, the obvious phenomenon of demand and supply will work and the increase demand in of corn and sugarcane etc. Which is required for manufacturing ethanol will result in prices. Thirdly, ethanol as fuel provides 20% less mileage as compared to gasoline. Thus, more refueling will be required and the transportation cost of these products will increase which will be added into main prices of food. Considering the emission of Carbonmonooxide by gasoline and ethanol per gallon, Ethanol takes the lead. Manufacturers have to take necessary measures for mitigating this effect as per Clean Air Act which requires further addition in….....

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