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#11
05-16-2006, 02:56 PM
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Re: Gas Economics Questions
[ QUOTE ]
[ QUOTE ] "demand remains the same", but "demand" is the amount consumed, therfore the answer to your first question is that the same amount is consumed. [/ QUOTE ] At the risk of being pedantic, demand is the relationship between price and quantity, not the amount consumed. Demand in conjunction with price gives the quantity consumed (quantity demanded). If demand remains constant and the price increases, then consumption (quantity demanded) decreases. Supply and demand are relationships between prices and quantities, not quantities or amounts. Quantities supplied and demanded are derived from those relationships. [/ QUOTE ] Precisely. 
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#12
05-16-2006, 02:59 PM
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Re: Gas Economics Questions
[ QUOTE ]
[ QUOTE ] [ QUOTE ] "demand remains the same", but "demand" is the amount consumed, therfore the answer to your first question is that the same amount is consumed. [/ QUOTE ] At the risk of being pedantic, demand is the relationship between price and quantity, not the amount consumed. Demand in conjunction with price gives the quantity consumed (quantity demanded). If demand remains constant and the price increases, then consumption (quantity demanded) decreases. Supply and demand are relationships between prices and quantities, not quantities or amounts. Quantities supplied and demanded are derived from those relationships. [/ QUOTE ] Forgive my inaccurate use of technical terms. You are correct that "demand" is academically expressed in value terms not quantity. Im just not sure that is the what the OP intended. [/ QUOTE ] It's definitely what I intended. "Academic" or not, quantity demanded is related to price; demand is not quantity itself.
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#13
05-16-2006, 03:16 PM
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Re: Gas Economics Questions
[ QUOTE ]
Hey ptmusic: if supply deminishes and demand remains the same, then quantity falls and prices rise. If dollar profits per unit stay the same (let's call it 10 cents per gallon to be perfectly clear), then profits will drop. [/ QUOTE ] Precisely. [ QUOTE ] But I'm going to be redundant here and point out the elephant in the room. Dollar profit per unit will not stay the same in this situation in an unregulated market (in fact, it will also generally shift in regulated markets). This is because money has a time value (is worth more now than later). Real world example: I'm a shipper. I was paying $1 to purchase and ship a gallon to market, which I sold at $1.10 for a ten cent profit. If my price rises to $2 per gallon, I can't go on taking a ten cent per gallon profit. My inventory cost has just doubled, so instead of having 10 billion dollars tied up in the oil inside Manpower-Valdez, I've got 20, and I'm now paying interest on considerably more money to keep the boats afloat. Since I need to cover this new cost, I must resell the oil at a price higher than $2.10 to maintain both my dollar level of profit as well as my percentage profit margins. [/ QUOTE ] That's a good point. But if you calculate the higher interest payments (increased future cash flows to debtors discounted back to present value) needed to cover the increased inventory (or other increased costs), and then spread those new costs out per unit: the price will go up (even more than without the added interest), but the dollar margin can stay the same. In other words, regardless of increased costs, it is possible to keep dollar margins the same. In your example, the cost to you to purchase and ship a gallon did not go up from $1 to $2, it went up to more than $2 (including interest). Still, you make a good point.
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