Running head: MATH IN ECONOMICS

Math in Economics
Kelly Kirby
University of Phoenix
Quantitative Reasoning for Business
QRB 501
Jacob Simmons
August 29, 2016
Math in Economics
The price of a gallon of gasoline has been fluctuating up and down and then up again for
the last 12 years or so. Although the consumer has been generally disappointed over the rising
cost of a gallon of gasoline, there are many components which are involved in the composition
of the cost of gas in the different areas of the states. The price of a barrel of oil averages about
63% of the average retail cost of a gallon of gasoline according to the Factors Affecting Gasoline
Prices. Another factor that would affect the cost of gas would be the taxes involved; including
federal and state taxes. Taxes account for a total of around 14% affecting the price of gas. The
remaining 23% of the cost is consists of the refinery costs, the profits, distribution of the product
and finally marketing for the product. For the purpose of this assignment, I will look at gas prices

from ten different locations in the area in which I live, and will examine what causes the shifts in
supply and demand and how these shifts generally influence the price of a gallon of gas.
What is supply and demand? Supply is the perception that helps to define the total
amount of product or services that are available to the consumer and is affected by oil
production. Demand is defined as the quantity the consumers want to purchase. The basic rules
of supply and demand have anticipated impact of the cost of a gallon of gasoline. If supplies are
limited, the cost of gas will go up. If refineries are shut down due to weather, or natural disasters,
production of crude oil will slow and will also impact the cost of gas to the consumer. The
population explosion over the last several decades has also impacted the demand for more gas to
be produced, especially during busy travel seasons. So supply and demand work in unison to
determine gas costs.
Gas stations are a business, and a business needs to make a profit in order to remain in
business. As gasoline prices increase and taxes remain high on a gallon of gas, the business in
turn will suffer due to these elements. To counter these damaging elements, most gas stations in
my area have also built convenience stores to around the station to supplement the income of the
business. These stores help to broaden the market to help absorb any losses the business may
incur due to the rising cost of oil.
After driving through the area I noticed that the trend of gas prices around my
neighborhood was significantly lower than the United States average of $2.21 gallon. This of
course is for the lowest grade of gas. The standard deviation for the national average is minimal.
In my area, the lowest gas price I could find was a few miles away in Myrtle Beach at the Costco
store. The price here was $1.84 per gallon. The Circle K gas station a few minutes down the road
had a gas price of $1.87 per gallon as well as the BP station across the street. Traveling down

MATH IN ECONOMICS

Highway 501 to the Coastal Petro station, the price climbed to $2.05 per gallon, but the Shell
Station on George Bishop Parkway only .5 miles from the Coastal station, the price dropped to
$1.99 per gallon. Once I was back on Highway 90 heading home I passed a Mobil station where
the price of a gallon of gas costs $2.01, with a Hess Station on the other side of road sporting a
price of 2.02 per gallon. The Kroger I passed had a price of 1.88 and another Circle K station in
North Myrtle Beach with a price of $1.85 per gallon. My final stop was a place called Liberty
gas where a gallon of gas cost $1.95. SO the average price of gas for my area is around $1.93.
Elasticity can reveal to how strongly the quantities which are being supplied and those in
high demand respond to varying factors including price and other elements. Understanding and
utilizing how strongly the quantity which is demanded or supplied will change pricing can be
very useful information to a business. For the consumers, the biggest decision is what type of
vehicle fall under the affordable range but still will afford the same standards. The substitution
effect of a price change will measure the extent to which consumers buy less goods or services in
response to an increase in its price relative to other goods and services (Keown, Arthur, John
Martin, J. Petty. 2013).
The higher the price elasticity, the more sensitive consumers become to price changes. If
the gas has a high elasticity, this may suggest that when the price increases, consumers will tend
to purchase less which causes an increase in supply. When the price of the gasoline goes down,
consumers will spend more and decrease the supply. Having a good with a low price elasticity
would mean just the opposite, that changes in price will have minimal influence on demand.

MATH IN ECONOMICS

References
Library Economics and Liberty. (2016). Retrieved from
http://www.econlib.org/library/Topics/College/supplyanddemand.html
Keown, Arthur J., John Martin, J. Petty. (2013). Foundations of Finance (8th ed.). Pearson
Learning Solutions
FactorsAffectingGasolinePrices.(2016).Retrievedfrom
http://www.eia.gov/energyexplained/index.cfm?page=gasoline_factors_affecting_prices

MATH IN ECONOMICS