Business Economics GM545 Week 2 Assignment

May 11, 2012

Exercise 1

Everyone gasoline problem

Gasoline prices in the United States have climbed steeply over the past few years. Gas was near $1 a gallon a decade ago. It took six years for the price to double to $2 a gallon in 2004. Four years later, in June 2008, gas prices have doubled once again to over $4 a gallon. The dramatic increase in the price of oil has been the most significant factor relating to the increase in the price of gasoline. The high price of oil is a simple case of supply and demand. The supply of oil has not increased in proportion with the increase in demand. (Rosenberg, 2012) In2012 gas pricing are at an all times high, I use to live on the Westside of Chicago, and I noticed that gas was much expensive on the North side than the Westside of Chicago. I had just move to the North side at the time but I would also get my gas from the Westside because it was much cheaper. However, I was shocked at how expensive it was to get a full tank of gas. Not to mention most of the time I would take public transportation because of the prices of gasoline. I would always wonder why is the gas so high, with the way the economy was going things would only get worse. I have to ask myself why the gas prices fluctuate. I have come up with a few reasons that could explain the reason for this action. I believe the more demand we have for gas the higher the prices will become. The companies that supply the gas know that consumers will buy the gas no matter what the price may be. Unless we plan on boycotting the gas station prices will continue to rise. Another reason gas fluctuate is because of the weather change, what I mean by this is in the summer gas prices are higher than the gas in the winter. The reason this happen is because of the high-energy bill consumer has doing the wintertime. Lastly another reason gas fluctuate is because of how much the business owner have to pay for loads of gasoline. They raise the prices in order to make profit off the product.

Chapter 3 Question 14 Assume initially that the demand and supply for premium coffees (one-pound bags) are in equilibrium. Now assume Starbucks introduces the world to pre- mium blends, and so demand rises substantially. Describe what will happen in this market as it moves to a new equilibrium. If a hard freeze eliminates Brazils premium coffee crop, what will happen to the price of premium coffee? To begin with, we all know that there will always be a high demand for Starbuck coffee no matter what kind of coffee they may offer. In addition, when a market is in equilibrium this would mean that the demand is equivalent to the supply. In fact, when Starbuck enter into a new market they would be considered a determinant of supply this would cause a shift in the supply cure. However if the demand for premium coffee rises than there will b a shift in demand curve. This would only happen if buyers increase for premium coffee. Nevertheless, if the demand for premium coffee is not good at all, than the demand will be low, Starbucks will lose money from this product, and this would cause the curve to shift once again. If the hard freeze eliminates Brazils premium coffee crop this could be a serious problem for Starbucks depending on the demand for premium coffee. This could drive the premium coffee off the market and cause the supply to curve. However depending on the demand for the coffee this could be good for the buyer especially if they have not invested too much into premium coffee. Chapter 8 Question 14 Assume a competitive industry is in long-run equilibrium and firms in the Indus- try are earning normal profits. Now assume that production technology improves such that average total costs

decline by $5 a unit. Describe the process this industry will go through as it moves to a new long-run equilibrium. Market price in the long run is PLR, corresponding to the minimum point on the SRATC and LRATC curves. At point e, P MR MC SRATCmin LRATCmin. This is why economists use compet- itive markets as the benchmark when comparing the performance of other market structures. With competition, consumers get just what they want since price reflects their desires, and they get these products at the lowest possible price (LRATCmin). (Stone, 2007)

Reference Page

Matt Rosenberg (2012) About.com: Gas pricing raising: Retrieved March 5, 2012 from online website http://geography.about.com/od/globalproblemsandissues/a/gasoline.htmbsite

Gerald W. Stone (2007) Core Economics: Retrieved March 6, 2012 from text book online