Question one; Everyone’s Gasoline Problem
The gasoline problem is indeed a global phenomena, and it is not unique to any particular region or country for that matter. The global prices for gasoline have been affected on an international scale and Long Beach, California has not been spared. The prices of gasoline in the recent past have been fluctuating dramatically in the area. On studying the recent gasoline pricing, one traces the large and dramatic differentials to as far as the year 2004 and 2005. This is the time when all these problems began.
During this time, the amount a common gasoline consumer could spend on purchasing gasoline rose from a low of $1.28 to a high of $3.45 per gallon. This caught every consumer by surprise and no one could have ever imagined spending that much on gasoline in California. The price differentials have continued over the years and less stability has been experienced in the global market of oil prices. Several factors related to the demand and supplies of gasoline have been stated as the reasons for the fluctuations experienced in the prices. Firstly, the process of globalization has seen an increase in the demand of gasoline, thereby leading to increase in the prices of the gasoline. This is the concept of elasticity; it is the responsiveness of one variable to changes in another. Thus, the price in gasoline is one variable and the demand is another variable. The increased demand for gasoline has raised gasoline prices. Secondly, the peak oil theory is slowly becoming a reality in the oil producing countries. This is the theory that suggests that the world would run out of oil and other natural gases at some point the near future. Thus most oil producing countries are running out of easy to drill oil deposits and the only deposits that have become available are those that require expensive drilling equipments and require a lot of work in refining. These facts have contributed to the fluctuations in the prices of gasoline.
Chapter 3 Question 15
The increased demand in gasoline has led many countries to start thinking of an option to replace this invaluable commodity. Consequently, the US has moved in this direction by encouraging the use of ethanol as gasoline in vehicles. Indeed, the country is ranked among the top ethanol producing countries since the year 2005. Ethanol is produced using corn as a feedstock, and this production process is affordable and simple. Thus, the use of ethanol has gained popularity in the country as an alternative to the ever expensive gasoline. The encouragement by the former president, George W. Bush for the country to reduce its reliance on gasoline and instead, focus more on the use of ethanol, has helped in the steady growth and increase in the use of ethanol. This has also been supported by the fact that, the use of ethanol has led to decreased gasoline consumption, which has helped stabilize the pump prices. Also, it has provided a cleaner and safer environment due to decreased greenhouse-gas emissions from the transport industry.
Indeed, the use of ethanol has been on steady rice as seen by the use of E85 fuel for flex-fuel vehicles. This increase in using ethanol has led to increased demand for corn in the production of ethanol, which has led to increased corn prices in the market. According to the report by CBO on, “The Impact of Ethanol Use on Food Prices and Greenhouse-gas Emissions”, 2009, the increase in demand for corns has risen by more than 50% between April 2007 and April 2008. Similarly, other farm commodities have also been caught up in the mix, such commodities as; soybeans, poultry, dairy products and meat whose prices have also increased. This has consequently affected the retail food prices. The report states that the increase in the food prices has been consistent with the increase in the use of ethanol.
Chapter 5 Question 17
The law of demand provides that as prices of a product increases, the demand for that product will fall and when the prices fall the demand will increase. In essence, where there is an increase in demand of two products, the prices for each of them must be favorable to consumers. The responsiveness of a computer chip to demand will depend with the current tastes and preferences of consumers in relation to other available alternatives. Where there is a cheaper alternative to the computer chip, then the demand of the computer chip will decrease. However, where computer chip remains to be the only cheap product in the market, its demand will continue to increase. The same is true for the potato chip. In order to increase production in the short run for the manufacturers, the prices of the two commodities will have to go up. This is simply under the law of supply, where an increase in the prices of the commodity will lead the manufacturers to increase their production, and thus, offering more of their products for sale. This comes with a guarantee that the higher the prices the greater the potential for making profits. The assured profits provide incentives for manufacturers to increase the production of their products. The long run for the two products differs in relation to the factors that determine demand of the products. When the determinants of demand vary, the two products will be affected. For instance, things like a change in taste and preferences of the consumers will affect the products. Where there are changes in the quantity demanded brought about by a change in the market product price, the demand for the products will either increase or drop. Also, an increase in the income of consumers may lead to increased demand of the products, while a decrease will lead to a drop in demand. Where there are related goods, their prices will affect the demand for the products in the long run. (Gerald, 2008)