Microeconomic Effects of an Increase in Gas Prices

Microeconomic Effects of an Increase in Gas Prices

When considering the ever-changing and highly competitive global landscape of business today, it is striking how many firms continue to rely on fossil fuels (particularly gas) as a primary means of facilitating operations. The functional inputs of countless organizations in countless industries are at the mercy of gas providers. Transportation mechanisms, factory machinery, construction equipment and climate control systems almost always require a petroleum-based source of fuel. And such operational instruments are absolutely vital to the market success of a myriad of small and large businesses. While some businesses have recently begun to realize and actively combat the drawbacks of this type of critical dependence, the actual market share of such firms is truly miniscule. For the majority of companies, an increase in gas or fuel prices has the potential to cause massive profitability and sales damages. What is more, being that petroleum is a global industry subject to various sources of fluctuation, firms at the microeconomic level have very few options available to protect themselves from the devastating fiscal effects of increases in gas prices. In fact, aside from switching to alternative energy mechanisms (which typically presents a very large up-front investment), there are no risk-free ways for firms to hedge or safeguard themselves in such an instance. This presents a unique situation, in that it is one of the only times that a firm cannot actively create security in the event of a profitability threat. Other threat sources can be managed through strategic productive and operational tactics. Thus, in such cases internal management would be ultimately responsible for the downfall of a company resulting from this type of threatening situation. Conversely, the collapse of an organization resulting from rapid spikes in fuel prices would seemingly be out of the company’s control. And as implied, from the microeconomic perspective, increases in gas and fuel prices always seem to have very negative operational consequences for almost all firms.

Don't use plagiarized sources. Get Your Custom Essay on
Microeconomic Effects of an Increase in Gas Prices
Just from $9/Page
Order Essay

In order to better understand the true scope of potential victims in the case of an increase in gas prices, it is important to determine the origins of why such spikes occur. The simplest answer is that such surges in gas prices occur as a result of increases in the price of crude oil. While gas is a very commonly used fuel, it is also a secondary source of energy. The diagram below illustrates the typical composition of an average gallon of liquid gas, which is the most commonly utilized of all gas fuels .

(Chevron Corporation, 2005-08, p. 1)

Therefore, as is easily ascertainable from the above depiction, gas prices are simply a result of crude oil prices. And knowing the evern greater amount of companies that utilize oil in their operations, the potential microeconomic effects are truly massive.

These injurious microeconomic effects are caused by the absolute essentiality of petrochemical fuels like gas in many production processes. And while other energy alternatives do exist, they often require permanent systematic restructuring and thus cannot be simply and quickly substituted to combat a sudden gas price increase . This reality creates a large degree of inelasticity in the microeconomic demand for gas. And when dealing with such inelastic demands, price increases do not equate to demand decreases, as would be the case in a normal economic situation of supply and demand. Rather, inelastic demand scenarios exemplify an organization’s necessitation for a given product (in this case, gas). Thus, firms are solely responsible for absorbing the increased cost of gas. This upsurge in fuel price is typically represented by a hefty increase in operating costs, which usually amounts to an equally significant decline in profits . The microeconomic graph below elucidates the concept of inelastic demand.

(University of Rhode Island, 2009)

As illustrated, when the price goes from “B” to “A” the quantity produced does not decrease very substantially. This is a result of the inelasticity of demand. For, companies must continue to operate and produce in order to meet the unchanged demands of their customers (Krichene, 2002). Therefore, assuming that a firm will not be able to adequately raise the price of their products or services to sufficiently meet the price increase of gas (this is typically a result of pre-existent contracts or fear of the loss of their market position), the shaded area labeled “A” in the figure would ultimately represent the company’s absorbed loss.

Furthermore, supply seems to be relatively inelastic as well in the case of gas. The figure above also heeds this reality. Though while this diagram actually depicts a supply shift resulting from a decrease in price, the effects of a supply price increase could easily be ascertained by simply working backwards. Beginning at price level “B/C” with the dotted line representing the supply curve, and moving to price level “A” with the red line representing the supply curve. Once again, while the price increase seems to be quite substantial, the decrease in supply is relatively nominal . This situation results from the recently soaring levels of fossil fuel consumption, which are accompanied by the rapidly declining rates of oil discovery sites . Consequently, the quantity of gas supplied to these firms remains at very close to the maximum attainable in response to the incessant demand .

As a result of this unique situational reality, in which both supply and demand are relatively inelastic, increases in petroleum-based fuel prices must originate from other areas. This is unlike normal economic inputs which fiscally fluctuate in response to demand and supply shifts. Crude oil prices, on the other hand, often increase as a result of natural disasters, increases in costs of extraction, locational difficulties or geopolitical developments . Therefore, relevant firms must be constantly aware of world oil trends and market price fluctuations. Such extensive knowledge will allow microeconomic entities to strategically approach the drafting of contracts and securing of future market positions . In doing so, companies must make additional considerations concerning potential future operating cost fluctuations in order to appropriately price their goods and services. These extra preparatory steps are the few available protective (though also highly speculative) mechanisms at every business’ disposal. This will also help to avoid sudden harmful surprises in the form of expense increases and subsequent revenue losses.

Another means of intricately examining the effects of an increase in gas prices would be to analyze some specific microeconomic organizational situations. By using a shipping or transportation organization as a framework, the specific corporate effects can be easily recognized and highlighted. Firms in the shipping business are among the largest consumers of petro-fuels like gasoline . Knowing this, spikes in gas prices can represent a monumental source of revenue losses for a shipping company. The primary revenue generators for a transportation-based firm come in the form of trucks, planes or cargo ships, each of which normally travels great distances and requires massive amounts of fuel . Also, such organizations almost always engage in contractual agreements with there clients. These contracts are often set a fixed price for the customer, which is typically valid for months or years at a time. Therefore, while the client is protected from fluctuations in price, the firm providing this critical service is poised for monumental losses at the hands of gas price increases.

Nevertheless, there are some means of protection available to shipping organizations. Although, while such measures would ultimately be taken as a way to provide future insurance, the implementation of many of these strategic securities comes with several operational risks. Most of these instruments would be incorporated into the contractual process with the customer. One such mechanism would be the integration of order minimums. By ensuring maximum capacity loads on each trip, transportation agencies can guarantee that they will at least be making the best use of the fuel they do consume. Another safeguarding apparatus would be to integrate renegotiation clauses into contracts. This would allow transportation companies to periodically manipulate prices according to fluctuations in operating costs. However, as mentioned above, these firm-friendly tools could also cause the loss of customer accounts and the future deference of new clients. Thus, firms should certainly strive to protect themselves from the unwelcomed microeconomic effects of gas price increases, though high levels of diligence are required to ensure that such protections do not backfire.

Another usable template for analyzing the microeconomic effects of fuel price increases would be to examine the workings of a traditional factory-oriented manufacturing organization. Production facilities are typically comprised of large amounts of complicated machinery and mechanical devices. These items themselves require large amounts of fuel to function efficiently, though this type of advanced equipment also must be housed in a climate-controlled environment . The grand scale of many factories requires an extremely complex and expansive climate control systems, which are yet another source of fuel consumption . Thus, while a firm in this industry may not use as much gas or oil as a firm in the transportation industry, the fact that such fuels are necessitated in multiple areas of production implies an equally significant fuel dependence. In other words, a manufacturing firm also stands to lose a great deal as a result of a sudden increase in the price of gas .

Though like a transportation-based firm, manufacturing companies do have a few strategic security tools at their disposal. However, in this case the implementation of such protective mechanisms usually occurs on a reactive basis as opposed to the preemptive approach available to transportation firms. For instance, manufacturing facilities can increase production and accumulate large inventories when fuel prices are low and slow production when fuel prices increase . This tactic allows factories to fill the orders from customers using the inventory they have compiled during more profitable operational circumstances. However, this technique also limits the firm’s capacity to secure new customers or new products.

Ultimately, there is little any firm can do to truly protect themselves from the potentially devastating microeconomic effects associated with increases in gas and fuel prices. While market knowledge and strategic operational and contractual tactics can be useful, they are often highly speculative and risky. Therefore, a macroeconomic shift (which would presumably encompass all relevant microeconomic inputs) away from the crippling dependence on gas and other fossil fuels certainly seems like the best solution to this fundamental problem. For with the necessity for energy generation throughout many vital industries and the unpredictability of current fuel prices, the present microeconomic structure seems destined for failure. Dependability is often considered to be a core competency required of almost all product and service providers. Thus, it seems only fair that the firms that are relied upon by citizens should have equally reliable operating cost structures.


Berkmen, P., Ouliaris, S., & Samiei, H. (2005, September). The Structure of the Oil Market and Causes of High Prices. Retrieved April 20, 2011, from http://www.imf.org/external/np/pp/eng/2005/092105o.htm

Cabedoa, J.D., & Moya, I. (2003). Estimating Fuel Price ‘Value at Risk’. Energy Economics, 25 (3), 239-253.

Chevron Corporation. (2005-08, January 1). What Affects Fuel Pricing – Basics of Supply & Demand. Retrieved February 11, 2011, from The Price of Fuel: http://www.thepriceoffuel.com/whataffectsfuelpricing/

Dahl, C. (2001). Analysing Gasoline Demand Elasticities. Energy Economics, 13 (3), 203-210.

DeCicco, J., & Mark, J. (2000). Meeting the Energy and Climate Challenge for Transportation in the United States. Energy Policy, 26 (5), 395-412.

Energy Information Administration. (2000). Fuel Oil Use in Manufacturing. Retrieved April 20, 2011, from http://www.eia.doe.gov/emeu/consumptionbriefs/mecs/fueloil/mecs_fueloil_use.html

Krichene, N. (2002). World Crude Oil and Natural Gas: A Demand and Supply Model. Energy Economics, 24 (6), 557-576.

Leigh, P.J., & Geraghty, E.M. (2008). High Gasoline Prices and Mortality From Motor Vehicle Crashes and Air Pollution. Journal of Occupational & Environmental Medicine, 50 (3), 249-254.

Nicol, C.J. (2003). Elasticities of Demand for Gasoline in Canada and the United States. Energy Economics, 25 (2), 201-214.

Silverman, B.S., Nickerson, J.A., & Freeman, J. (1999). Profitability, Transactional Alignment, and Organizational Mortality in the U.S. Trucking Industry. Strategic Management Journal, 18, 31-52.

University of Oregon. (1999). Fossil Fuel Production and Consumption. Retrieved April 20, 2011, from http://zebu.uoregon.edu/1999/ph161/l10.html

University of Rhode Island. (2009). Elasticity. Retrieved April 20, 2011, from http://www.uri.edu/artsci/ecn/mead/INT1/Mic/Elast/index.elast.html

Wissner, A. (2007, May). Peak Oil – Inelastic Supply meets Inelastic Demand. Retrieved April 20, 2011, from http://valuesystem.livejournal.com/11447.html

Get Professional Assignment Help Cheaply

Buy Custom Essay

Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?

Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.

Why Choose Our Academic Writing Service?

  • Plagiarism free papers
  • Timely delivery
  • Any deadline
  • Skilled, Experienced Native English Writers
  • Subject-relevant academic writer
  • Adherence to paper instructions
  • Ability to tackle bulk assignments
  • Reasonable prices
  • 24/7 Customer Support
  • Get superb grades consistently

Online Academic Help With Different Subjects


Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.


Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.

Computer science

Computer science is a tough subject. Fortunately, our computer science experts are up to the match. No need to stress and have sleepless nights. Our academic writers will tackle all your computer science assignments and deliver them on time. Let us handle all your python, java, ruby, JavaScript, php , C+ assignments!


While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.


Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.


In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.


Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.


We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!


We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.


Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.

What discipline/subjects do you deal in?

We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.

Are your writers competent enough to handle my paper?

Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.

What if I don’t like the paper?

There is a very low likelihood that you won’t like the paper.

Reasons being:

  • When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
  • We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.

In the event that you don’t like your paper:

  • The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
  • We will have a different writer write the paper from scratch.
  • Last resort, if the above does not work, we will refund your money.

Will the professor find out I didn’t write the paper myself?

Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.

What if the paper is plagiarized?

We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.

When will I get my paper?

You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.

Will anyone find out that I used your services?

We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.

How our Assignment  Help Service Works

1.      Place an order

You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.

2.      Pay for the order

Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.

3.      Track the progress

You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.

4.      Download the paper

The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.

smile and order essaysmile and order essay PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!

order custom essay paper