Exercise 1. Microeconomic Issue: “Everyone’s Gasoline Problem”The average price for regular gasoline in Atlanta, GA is $3.572. Compared to this same time last month, the average price in Atlanta has decreased about 13 cents; from a year ago, prices have decreased by 15 cents.
Gas prices are like rollercoasters – they go up, then down, then up again. Consumers continue to observe the fluctuations in gas prices, which are influenced by factors such as the cost of crude oil, refinery costs, taxes, and distribution of gas (Shipp, 2008). Overall, these factors are influenced by two primary economic dynamics – supply and demand. For example, let’s take a look at season transitions as gas prices fluctuate seasonally. According to the U.S.
Energy Information Administration (2013), prices tend to be at its highest during the warmest or summer months due to several reasons.First, prices will be affected by the transition to summer-grade gas, which is much more expensive to produce than winter-grade. Second, there are more vehicles on the road in the summer months as people tend to take migrate to the outdoors for various activities and vacations. In this case, there is a higher demand for gas during this time assuming that crude oil prices are stable.
According to the law of demand, if the demand for gas increases relative to supply, then prices will increase (Stone, 2008). With this in mind, consumers should expect gas prices to be lower as colder weather approaches due to decreases in demand. During the fall and winter months, there are significant pattern changes in demand because many consumers choose different means of transportation such as bus, carpooling and even purchasing more gas efficient and/or electric vehicles.In terms of supply, the U.
S. Energy Information Administration (2013) is expecting the price of crude oil to fall from the average $112 per barrel to $108, which reflects the increasing supply of fuels from non-OPEC countries. This illustrates the law of supply which states an increase in supply results in a decrease in price (Stone, 2008).Exercise 2From an economic standpoint, equilibrium occurs when a market is in balance. In this case, quantity demanded by consumers is equal to quantity supplied by producers (Stone, 2008).
Since both the supply and demand of premium coffee are equal, the price remains stable. With the introduction of Starbucks premium coffee, demand will likely increase causing a shift in the demand curve and a new equilibrium. When demand increases, both the equilibrium price and output increase as well (Stone, 2008). The supply curve remains unchanged; however, there is movement along the curve. A change in supply could possibly be a result of a hard freeze eliminating the premium coffee crop. If this occurs, there will be a negative shift in the supply curve.
When supply decreases, the equilibrium price increases and the output decrease (Stone, 2008).A change in both supply and demand at the same time may cause different changes to equilibrium than described above. If Starbuck’s introduction of premium blends increases demand while a hard freeze decreases the crop, the equilibrium price will increase, but the new output will remain indeterminate.Exercise 3A. A rise in the demand for computer chips and potato chips will reflect different responses. The demand for potato chips would be more responsive due to the nature of its availability and means of production.
Compared to computer chips, the production of potato chips: Require less equipment/materials.Will not necessarily require skilled labor Shorter production time Potatoes are more readily available Production process is not as sophisticated or complex Manufacturers of computer chips may still be able to satisfy or meet the demand, but it would be a longer process, require skilled labor as well as production costs.B. In the short run, production for both products can be increased by: Adding additional shifts/labor to production line. Purchasing or renting more equipment (more machines = greater output).
Seek third-party manufacturers that may be able to assist in the productionC. In the long run, a positive shift in demand will result in increased competition and the need to keep up with growing demand. For example, although potato chip producers may be able to have a greater output of product in the long run, production is still dependent on supply – potato crops. If potato crops are not doing so well, there may be a decrease in supply.
As for competition, a rise in demand may prompt other manufacturers to join the production game. In order to thrive or keep up with others, these manufacturers will have to sell their products at a price that is more appealing to consumers. Additionally, their products will have to standout more or offer greater benefits for consumers.
