INTRODUCTION:

Most people believe the price of oil is the primary determinate of the price of gasoline, but
the forces that influence gas prices are a bit more complicated than the numbers suggest.
To help understand how gas prices are set, it helps to examine supply, demand, inflation
and taxes. While supply and demand get the most focus and the most blame for the high
price of gasoline, inflation and taxes also account for large increases in the cost to
consumers.
Over the short term, as prices rise or fall, demand tends to be relatively inelastic. People
only make small changes in their consumption of gasoline when there are large changes in
the price, and this pattern helps balance the supply and demand of gasoline.

Over time, we can expect to see a movement toward lower fuel consumption at the
individual level, but an increase in the number of people who depend on gasoline
worldwide. These changes will no doubt impact the price we pay at the pump.

While there is a common belief that the price of gasoline is solely determined by the supply
and demand of crude, several other important factors come into play as well. Taxes,
depending on the country, can add substantially to the retail price of gasoline. Over time,
inflation also results in higher gas prices.







Statement of the problem:
This study aims to answer the following:
1. Average retail prices of gasoline from 1994 up to 2013
2. Effect of changes of gasoline prices(relatively inelastic) in the supply and demand
curve
3. People or organization involve in determining the oil price in the market

OPEC
One body has great influence over the worldwide price of oil. The Organization of
Petroleum Exporting Countries (OPEC), more commonly known as OPEC, is
a cartel comprising 12 of the world's biggest oil-producing nations, including all of the
major Middle Eastern states, Venezuela and Nigeria. According to OPEC, this cartel controls
78% of the world's known oil reserves. The major oil producers not in OPEC include Russia,
Canada and the United States.
Since OPEC's nations produce so much of the world's oil supply, they can manipulate the
price per barrel depending upon how many barrels per day the group will sell on the world
oil market. If the group wants the price to rise - in order to make more money - they can
reduce the amount of oil contributed to the world market. And if they want the price to dip
- high energy prices drive down demand from OPEC's consumers - they can release more
barrels to the market.


.
Inflation
Inflation And Taxes
Inflation and taxes account for the biggest relative increases in the price of
gasoline
Inflation is the general rate at which prices of goods/services are rising (and,
conversely, the rate at which purchasing power is falling). In the U.S., an item
that cost $1 in 1950 would cost about $9.30 in 2010. In 1950, gas cost about 30
cents per gallon. Adjusting for inflation, a gallon of gas should cost about $2.79,
assuming taxes, supply and demand stayed the same. The level of inflation
varies by country, which can influence the price of fuel. (To learn more about
inflation, read our All About Inflation Tutorial.)
Taxes
The tax on a gallon of gas in 1950 was approximately 1.5% of the price. In 2011,
the federal, state and local tax on a gallon of gasoline was approximately 20% of
the total price. This means that taxes added about 48 cents to the price increase
in a gallon of gas. Federal tax made up 18.4 cents, state tax made up 20.6 cents,
and local and other taxes made up 9 cents per gallon as of January of 2011.
Other countries have vastly different tax policies for gasoline, some of which can
make taxes the largest price component.

Conclusion
Oil is one of the world's most important commodities, and as a result, the nations that
control the bulk of the world's supply have (and exercise) a great deal of power over its
availability. The supply of oil in the world market has an impact on its price, and the
fluctuations are passed on to consumers, especially in nations that use a lot of oil, such as
the U.S. Oil prices are also determined by quality and ease of refining. Investors have the
option of investing in oil futures, which themselves have an influence on the price of oil that
is reported in the media. All in all, the oil market is quite complex, and a better
understanding of how the oil gets from the ground to you, in all its forms, will help you to
understand and deal with fluctuating prices.

RELATIVELY INELASTIC:
An elasticity alternative in which relatively large changes in one variable (usually price)
cause relatively small changes in another variable (usually quantity). In other words,
quantity is not very responsive to price. Quantity does change, but not much, in response to
large changes in price. This characterization of elasticity is most important for the price
elasticity of demand and the price elasticity of supply. Relatively inelastic is one of five
elasticity alternatives. The other four are perfectly elastic, perfectly inelastic, relatively
elastic, and unit elastic.
Relatively inelastic means that relatively large
changes in pricecause relatively small changes
inquantity. In other words, quantity is not very
responsive to price. More specifically, the
percentage change in quantity is less than the
percentage change in price. Relatively inelastic
demand occurs when buyers can choose from
among a small number of imperfect substitutes-in-
consumption. In an analogous way,
relatively inelastic supply occurs when sellers are
able to produce goods only by switching resources
among a small number of imperfect substitutes-in-
production.
Alternative Coefficient (E)
Perfectly Elastic E =
Relatively Elastic 1 < E <
Unit Elastic E = 1
Relatively Inelastic 0 < E < 1
Perfectly Inelastic E = 0
The chart to the right displays the five alternatives based on thecoefficient of elasticity (E).
In technical shorthand (typically used by economists who were originally trained as court
stenographers), the coefficient of elasticity (E) is given as:
0 < E < 1
This technical shorthand works for both the price elasticity of demand and the price
elasticity of supply, because the negative value of the price elasticity of demand is ignored.
If the negative sign on the price elasticity of demand is not ignored, then relatively inelastic
demand is specified as -1 < E < 0.
Two Curves
Like many economic concepts, relatively inelastic
demand and supply are better understood with
graphs. The blank graph presented here is poised
and eager to display a relatively inelastic demand
curve and a relatively inelastic supply curve. It will
do this when the corresponding buttons labeled
[Demand] and [Supply] are clicked.
The most notable note worth noting is that both
curves are very steep. They are not perfectly
vertical, as would be true forperfectly
inelastic demand and supply, but they ARE very
steep. The steepness of these curves is designed to
visually indicate that relatively small changes in
quantity result from relatively large changes in
price.
However, having highlighted the steepness of these
curves, please note that slope and elasticity are two
different concepts. In particular, it is NOT possible
to determine the elasticity of a demand curve JUST by looking at its slope. A steeply sloped
demand curve, like the one displayed here, actually could be relatively elastic. The key to
indicating relatively inelastic demand is that this is the lower segment of the curve, the part
near the horizontal quantity axis.
An example or two should help illustrate relatively inelastic demand and relatively inelastic
supply.
Demand
The key for relatively inelastic demand is that a good has very few substitutes-in-
consumption. Buyers can be enticed to switch between this good and other goods, but
doing so requires big price changes. Buyers could switch to a substitute good if the price
Relatively Inelastic Curves





gets a little too high, but they would rather not. The fabricated example offered for
purposes of illustration is Merciless Monolithic Media Masters (4M) Cable Television. This
is a distinctive product with few close substitutes-in-consumption. The closest substitutes
are broadcast television (the networks), satellite systems, movie theaters, video tapes,
DVDs, broadcast radio, live theater, other live entertainment, newspapers, magazines, and
books. None provide quite the same satisfaction as cable television. They are substitutes,
but not great substitutes.
As such, the demand for 4M Cable Television is relatively inelastic. 4M Cable Television can
change prices and buyers continue to buy ABOUT the same quantity. If the price increases
too much, then 4M Cable Television buyers will install satellite systems, read books, or rent
feature films on DVD. If the price falls too much, non-4M customers will decide to buy the
4M Cable Television services. Because these alternatives are NOT close substitutes, it takes
relatively large price changes to induce buyers to switch.
Supply
The key for relatively inelastic supply is that a good has very few substitutes-in-production.
In particular, it is very difficult to switch resources between the production of this good
and others using the same resources. In many cases the good uses highly specialized or
rare resources that are difficult (and thus costly) to acquire. One hypothetical example of
relatively inelastic supply is Mona Mallard Duct Tape.
While it might seem as though duct tape (that shiny gray tape that is used for every
conceivable purpose EXCEPT sealing ventilation ducts) is easily produced by switching
resources from the production of cellophane tape, electrical tape, or adhesive tape, Mona
Mallard Duct Tape has a special "something" that generates a relatively elastic supply. That
special something is quagliminium, a rare adhesive substance found only in the natural
vegetation growing in the isolated country of Northwest Queoldiolia. Therefore, to increase
the quantity supplied of duct tape, Mona Mallard must acquire greater amounts of
quagliminium, which is always an expensive proposition.
As such, the supply of Mona Mallard Duct Tape is relatively inelastic. The price Mona
Mallard receives for its duct tape must rise significantly before there is much of an increase
in the quantity supplied.