Re: Fuel Prices

Posted by Demand on August 20, 2005 at 18:41:49 from (148.134.37.2):

In Reply to: Re: Fuel Prices posted by Tom in TN on August 20, 2005 at 17:59:24:

I believe its all about maximizing profits. If you ran a produce stand and told your customers that the farmers cost went up 50% and therefor you had to increase your prices 50%, then as long your customers continue buying just as much produce then you would not lower your price. I know thats hypothetical but assume their were more than just the farmer and the produce stand owner involved in getting the produce to the customers, e.g. shipping, warehouse, marketing, and middleman. If the middleman paid the farmer 50% more for the produce, well it didn't cost 50% more to ship it, or store it or advertise it, it actually cost 50% more of 25% of the operation or in assence his cost went up 12.5%. you would think that the middleman would then charge the produce owner 12.5% more for the produce, but remember we are maximzing profits. Know imagine that if everone was always talking about the high price of produce and it was on the news and in the paper everyday, also image that demand was so high for produce that the produce stand owner couldn't keep his product in stock. Well then the middleman could increase his price by 50% or more and the produce man will still buy and it increase his price by 50% or more as long as he can still sale it and make as much money or more money. If the consumer refuses to pay the extra price for the produce then the produce stand owner would not sale as much and therefor will reduce his demand for the product from the middleman. The middleman would have to reduce his price to encourage the produce stand owner to buy more. Its a lot like a big silly game each industry involved in getting the product to the consumer tries to maximze his profit including the farmer. Or in the case of gasoline the crude oil manufacturer. If the crude oil manufacturer can increase his price and still maintain the same or higher profit he will continue raising his price untill profits drop back. Each company along the process continues this process all the way to the convience store owner who actually sells the gas to the consumer. The drawback for the mom and pop convience stores is that cost has gone up so much by the time the gasoline gets to the store they are struggling to make a profit and keep the gas at a competitive price.
It all falls back to demand. If demand drops the convience store sells less gasoline and therefor will not have as much gas delivered to the store from the gasoline company. The gasoline company must therefor reduce their price to continue selling the product, this backward cycle continues all the back to the crude oil manufacture.

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