Thursday, December 08, 2005

Law of Supply and Demand – Gas Prices Fall 88 Cents

Do you believe in the economic law of supply and demand? The price of gasoline in the United States rose to over $3.00 a gallon due to Gulf of Mexico hurricanes lowering supply. Certainly, the oil company executives would like prices to stay at that level, but as supply has come back on line, gasoline prices have fallen, and fallen remarkably fast.

See USA Today December 5, 2005 article Gas prices continue to drop
- “The weighted average price for all three grades dropped to $2.16 a gallon on Dec. 2, Lundberg said.”
- “Prices have fallen about 88 cents a gallon since September, Lundberg said.”
- “Gasoline hit its all time high of $3.01 per gallon on Sept. 9, after Hurricane Katrina sharply cut refining capacity.”

A key aspect of the law of supply and demand is price changes communicate to providers and consumers important information that should alter their behavior. With the price going up, the message to the provider is to provide more while the message to the consumer is to use less.

It is quite a selfish statement to know that there’s less of an item available, and still wanting the consume the same quantity as before and at the same low price. Selphish and showing economic ignorance.

The worst response is for the government to increase its involvement as there are no shortages at the market clearing price.

Dr. Richard A. Palfin of Sunnyvale, Calif. Wrote a letter-to-the-editor Wall Street Journal August 4, 2005 addressing housing, but very much this issue. His letter included:
- “The "shortage" hypothesis is often used in several contexts by the press. National media have reported shortages of engineers, business faculty, teachers, nurses and a host of other professionals. Proponents of these shortages, however, overlook fundamental economic principles. They speak of shortages as though shortages represent some absolute, readily identifiable lack of desirable goods and services. Price is seldom accorded its proper role.”

- “There is never enough of any good or service to satisfy all wants or desires. The consumer must give up something to get something. The buyer must pay the market price and forego whatever else he could have for the same price. The forces of supply and demand determine these prices”

- “All goods and services are scarce, but scarcity and shortages are by no means synonymous. Scarcity is a regrettable and unavoidable fact. Shortages are purely a function of price. The only way in which a shortage has existed, or ever will exist, is in cases where the "going price" has been held below the market-clearing price.”


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