Gm 545 Essay
Summer B, 2010
Exercise 1: Everyone’s Gasoline Problem
“In recent years, the world's appetite for gasoline and diesel fuel grew so quickly that suppliers of these fuels had a difficult time keeping up with demand. This demand growth is a key reason why prices of both crude oil and gasoline reached record levels in mid-2008. By the fall of 2008, crude oil prices began to fall due to the weakening economy and collapse of global petroleum demand, which had pushed oil prices to record levels earlier in the year. These factors helped gasoline prices drop below $2 per gallon of regular gasoline in late 2008 and early 2009, the lowest prices in three years (U.S. Energy Information Administration, 2010).” …show more content…
When supply and demand are equal the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. (Investopedia.com) Assuming that the demand and supply for premium coffees (one-pound bags) are in equilibrium this is what has occurred.
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. (Investopeida.com) If Starbucks introduces premium blends this will cause the demand to raise substantially and the supply would be affected causing prices to rise. As the market moves to a new equilibrium and the price becomes higher, you will see that consumers that purchase the product may start searching out substitutes if they are not willing to