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Supply and Demand Forces Pertaining to Gas Prices

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The Price of Gasoline

Would you rather have the forces of demand and supply determine the price of gasoline which you pay at the pump, or would you prefer a government mandated price ceiling? What problems would a price ceiling on gasoline bring?

There are two different schools of thought on how to lower gasoline prices and reduce US dependence on foreign oil. One can either:
1. Increase SUPPLY of oil (drilling offshore), or
2. Decrease DEMAND (finding alternatives to oil).

Can you graph how these two changes will bring about lower gas prices? Which school of thought do you subscribe to? Here are some articles to give you some perspective.

National Public Radio: Bush Calls on OPEC to Pump More Oil

USA Today: McCain pushes offshore-drilling plan

The Economist: Greener than thou

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Solution Summary

The solution shows the interaction of demand and supply in the market for fuel. A graphical presentation of the interplay of the market forces is shown in the attached three-page file.

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Natural forces of supply and demand regulate the proper functioning of goods and services in the market in setting the price. Price ceiling distorts this law. This is the hallmark of a free market economy. The U.S. economy works in a free market economy. Price ceiling policies will only distort the economy further.

A capitalist economy relies on the interplay of supply and demand of gasoline. Price ceiling policy is only compatible in a centrally planned economy.
Setting a price ceiling, according to Blake (2012), will only result to inefficiencies and should be avoided.

Regarding the two schools of thought, let's consider ...

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