Thursday, May 11, 2006

Supply and demand and the law of averages

Today I got one of the dumbest chain letters I have seen in a while. (OK, they're all dumb, but this one really takes the cake.) It starts off talking about the price of eggs and how the demand for eggs affects the price... and how if people suddenly started buying fewer eggs at a time, there would be a glut of eggs at the supplier and the price would drop. Then it goes on to apply the same assumptions to the gasoline market. For those who haven't seen the whole thing yet, you can read it on Snopes.com.

The proposed scenario is that if people started buying only a few gallons of gas at a time instead of filling their tank, we would cause the stations' tanks to stay full all the time. Even before I read the response on Snopes, I immediately knew that this was a ridiculous assumption because the story completely fails to take into account the law of AVERAGES. And more importantly, the story doesn't talk about reducing consumption, only changing your buying habits.

Let's look at the facts. Let's say I buy 10 gallons of gas once a week from gas station X. Let's say there are six other people out there just like me that all fill up at gas station X. And let's go a step further and say we are the ONLY customers that buy gas at Station X. Maybe we all fill up on the same day (unlikely), or maybe we each fill up on a different day (just as unlikely), but no matter when we fill up, Station X still sells 70 gallons of gas that week, and he needs to order 70 gallons to replace it.

Now the next week all seven of us decide that instead of buying 10 gallons once a week, we'll all buy just 2 gallons at a time. But we still all drive the same amount and consume the same amount, so we now need to stop at the gas station FIVE times instead of just once. So what happens? Absolutely nothing. Station X still sells 70 gallons of gas that week, they just sell it in 35 transactions instead of seven. Yes, there might be a short-term surplus because on Monday the people who filled up on Saturday and Sunday don't need gas yet, and the person who filled up last Monday is only buying 1/5 of the normal amount. But that surplus will be quickly corrected, and by week two Station X is back to selling EXACTLY the same amount of gas per day as they did before.

If anything, the only thing this proposal would do is drive prices UP. Why? Because every time a customer uses a credit card, the merchant gets charged a flat fee for the transaction (usually $.20-$.30) plus a percentage of the sale. Whether the customer buys $4 or $40 worth of gas, that flat fee stays the same. So now Station X has to charge MORE in order to make up for the fact that they now have 35 credit card charges a week instead of seven.

1 comment:

Jen said...

Not to mention that gas prices tend to go up on the weekends, so you're actually more likely to spend MORE on your gas if you do it this way.