Wednesday, February 22, 2006

Price At the Pump

Eric, over at GrimReader has a fantastic narrative on how market pressures such as supply and demand can influence gasoline prices. I’ll quote a small excerpt here, but read the whole thing.

One morning, the station operator gets a call from his supplier, telling him that they lost power to the refinery and won't be able to make his delivery this week. That's a problem, because at the rate he is selling, the tank will be empty by the Tuesday and most of his business comes on Friday and Saturday.

He has a couple of options: shorten his hours, shut a few pumps down, or raise prices. You can see three other stations from his property, so shortening the hours and shutting pumps down to create an artificial shortage is only going to lose market share and do nothing to address his fixed costs, so he thinks about raising prices.

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