How You Choose the Price of Gasoline

I am often alarmed at how ignorant the populace is on the subject of economics. I'm not talking about the theory of diminishing marginal value or consideration of the upward limit on the boundary of the firm, but of simple economic concepts such as supply & demand. If you ask them, everyone claims to understand this most elementary law of human exchange, but hardly anyone actually believes it. For example, nearly any man you encounter will complain that gas prices are set by evil oil corporations and that we consumers are held hostage to these prices by our need to drive. There's no way gas should be $x a gallon, they say. It should always be x-n.

The absurdity of this argument can be shown to be apparent in a matter of seconds and it is a testimony to the wretched condition of standardized education in America that it survives at all, let alone that it is popularly accepted by even the relatively intelligent among us. If the oil and gas companies can charge whatever they like for their product, then why do they stop at say $2.87 a gallon? Why not $50 a gallon? Or $100? Or $1 million? I agree that giant oil corporations have no compunctions about getting every penny from you that they can. So then why do they stop at such a paltry amount if the only limit on their ability to increase prices is the amount of zeroes they can fit on a sign?

From the law of supply & demand we derive that as the cost of something goes up, ceteris paribus, the demand for that something decreases. The gas station doesn't charge you $100 a gallon because you won't pay it. They will not sell as much gas and therefore will not make as large of a profit, if any profit at all. If you would pay $1,000 for a gallon of gasoline, I assure you that they would charge that amount. And so it is for all prices. Your employer pays you what he thinks you will accept and not a penny more. The pizza parlor charges what they think you will pay and not a penny less.

Now we can see that it isn't the big oil companies who decide whether or not a gallon of gas will sell above or below $3. It is the consumers who are the sovereigns. Anyone who says that the price of gas is too high, and then chooses to pay that price, has just contradicted himself. Just like the obese man who says he wants to lose weight but can never find time to get to the gym, or the woman who says she wishes she could find a nice guy right before running into the abusive arms of the nearest cad, it is the actions of the economic actor we must observe while discarding his words.

The next time you feel upset at the amount of federal reserve notes you have to exchange for a tank of gas, remember that you only have yourself to blame.