Ethics

Let us first discuss how the gasoline prices are set, the market place forces of supply and demand determine the price of fuel. If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices. Those principles apply at the service station level as well. If a retailer prices its gasoline too high, and without regard to competition, the retailer's customers may take their business to another station with lower prices. If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.

In any market situation, supply and demand imbalances can affect prices in both the short and long term. If the supply is disrupted, as it was after Hurricanes Katrina and Rita, short term demand for the product may exceed the supply on hand and put upward pressure on prices.

The basic reason was the imbalance between supply and demand. Gasoline, including gasoline blending components, moves from region to region. When crude oil and gasoline production were shut in following Hurricanes Katrina and Rita, the country's gasoline supplies were reduced approximately 10 percent. Gasoline supplies were moved to the Southeast from other parts of the country, affecting supply in those areas. That put upward pressure on prices, as supply was affected but demand remained high.

The above case clearly shows how the shortage in supply increases price. In the same way Demand of the consumers reacts according to the prices of products following law of demand. In the case of gasoline, limited substitutes for gasoline restrict the options available to consumers to respond to price increases and therefore it can be said that elasticity of demand for