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Econ 545 Course Project

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Course Project – Part 1

By: Erik Gomez
Econ545
11/7/13
Professor: LILIANA N. FARGO PH.D.
Ejgomez4@gmail.com

Everyone’s Gas Problem
Gas prices fluctuate in the U.S. every year and the current national average is around $3.67 yet in Chicago the average gas price is $4.10 (press). What causes gasoline’s prices to fluctuate? And why are Chicago’s gas prices one of the highest in the nation? One of the culprits is supply and demand. OPEC (Oil Producing and Exporting Counties) governs 81 % of the world’s oil reserves and can easily influence the price of crude oil by either increasing or decreasing the production(OPEC). Since gasoline is relatively inelastic, consumer will still need to purchase it even at a higher price.
Taxes also influence the ultimate price of gasoline as it tends to distort the price. Chicago’s taxes fluctuate between 70 to 90 cents per gallon in comparison to the rest of the state, which averages around 40 cents a gallon. The cause of higher taxes involves the city spending habits. For example, Millennium Park cost the taxpayers $270 million.
World events, to my surprise, have a significant impact in the fluctuation of oil prices. War, national disasters, hurricanes and floods all play a factor in the ultimate price of gas. When BP had their rig explode in 2010 it created a ripple effect around the world causing and increase in demand from other sources driving up the price of crude oil effectively increasing gas prices. These events create a downward shift in the demand curve and if demand remains the same yet the supply is reduced this leads to a new equilibrium price.

2. Chapter 5 – Question 17
a) If demand suddenly increases for both potato chips and computer chip, the responsiveness will differ. During a market period both potato and computer chip manufacturers are handcuffed due to a lack of time to change production

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