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Eco/561 Week 2 Essay

591 words - 3 pages

Market Equilibration Process Paper
ECO/561
June 7, 2012
Dr. Jill Trask
Market Equilibration Process Paper
Market equilibration can be accomplished when market price established through competition so the amount of good bought is equal to the number of goods sold. Supply and demand would be factors to change the market equilibrium. In the oil industry market equilibrium is determined by the cost of oil, competitor’s prices, and technology.
“As a price falls, the quantity demand rises, and as a price rises, the quantity demanded falls” (McConnell, Brue, & Flynn, 2009, p. 47). Consumers travel constantly to go to work, school, or vacation. This travel requires the use of some form of transportation whether it is train, airplane, or automobile. The transportation modes use a form of fuel to move the vehicles. Certain periods increase the demand for fuel or decrease ...view middle of the document...

As the demand increase the supply will increase, same with the demand decreasing the supply will decrease. The increase in fuel costs will decrease the demand for fuel as travelers find alternate ways to their destination. “As price rises, the quantity supplied rises; as price falls quantity supplied falls” (McConnell, Brue, & Flynn, 2009, p. 51).
Fuel prices can raise some before consumers begin to stop traveling as much. With a recession consumers will tighten their belts wherever they can, including reducing the amount of fuel they purchase, lowering their heat in the house to reduce the heating bill, and shop less often to reduce trips to the grocery store. When fuels prices drop the consumers reverts to old habits of driving themselves to work rather than carpooling, turning up the heat to be comfortable, and running to the grocery store more than necessary. Fuel is a product that does not seem to follow the laws of supply.
Efficient market theory suggests share prices must reveal available information and private information. Based on this theory the price of fuel should be the same for consumers regardless of the provider if the price of a barrel of oil is available to everyone. If the price of oil is $ 100 per gallon consumers could assume they should pay $3per gallon at the pump at every station. The problem with this theory is refiners have various ways of refining the crude into fuel for automobiles. The way one refiner develops their product could be more efficient from newer equipment than their competitors who need to upgrade equipment.
Market equilibrium process is a tough process with the oil industry based on that the lower the price the more consumption from consumers which will affect the law of supply and demand. Competitor’s prices affect the demand for fuel as does the cost of crude oil.

Reference
McConnell, C.R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin.

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