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Gas Elasticity & Gas Station Survival

In: Business and Management

Submitted By djuvane
Words 740
Pages 3
In many ways, world economies hinge on the availability and affordability of gasoline. We depend on it to fuel vehicles that transport people and goods; both of which can be considered necessary for our societies to work. No matter the price of gas, people need to get to work, school or soccer practice. Goods must be moved from warehouse to stores, from New York to California to be sold and all this requires the use of gasoline. There is no close substitute for gasoline - without changing cars, vehicle owners must continue to buy gasoline to drive. There is no gas-electric conversion kit for a car and most people cannot afford to trade in their gas guzzler for a jazzy new hybrid or electric car. For these reasons, historically, the demand for gasoline has been inelastic with an estimated price elasticity of 0.25 (short run) and 0.64 (long run). This suggests that the fluctuations in prices have little impact on the actual demand and usage of gasoline in the short term while having a more, but still insignificant, impact in the long term. On the other hand, the supply of gasoline is typically considered to be elastic with a price elasticity of 1.6 (short run). This would suggest that the higher the price, the more gasoline is available to the retailers and consumers. This is true because gasoline refiners tend to produce less when prices are low in an effort to minimize losses and to help prices back to a profitable level. Since 1998 we have seen a steady increase in the price and demand of gasoline as our world becomes more dependent on the gasoline. The increases and decreases in gasoline prices over the last three years cannot be accounted for by any one factor or economic theory. Instead it is more likely a complex interaction of supply, demand, economic and political factors.
Between January 2007 and July 2008, gasoline prices increased drastically by 76%

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