First time running a ruby app - ruby

Question

I am trying to run a Rails app on my Snow Leopard Mac. I never worked with Ruby or Rails before, so any hint is welcome.
In terminal I went to the folder of the app, and ran rails server
and received the following error:
Could not find gem 'mysql2 (>= 0) ruby' in any of the gem sources
listed in your Gemfile. Run `bundle install` to install missing gems.
My gemfile looks like:
source 'http://rubygems.org'
gem 'rails', '3.1.0'
# Bundle edge Rails instead:
# gem 'rails', :git => 'git://github.com/rails/rails.git'
group :development do
gem 'mysql2'
end
group :production do
gem 'pg'
gem 'thin'
end
and database.yml has adapter: mysql2 for all environments. I already ran bundle install, and from running gem list I got:
mysql2 (0.3.11)
My gem environment is:
RubyGems Environment:
- RUBYGEMS VERSION: 1.8.17
- RUBY VERSION: 1.9.3 (2012-02-16 patchlevel 125) [x86_64-darwin10.8.0]
- INSTALLATION DIRECTORY: /Users/user/.rvm/gems/ruby-1.9.3-p125#rails3
- RUBY EXECUTABLE: /Users/user/.rvm/rubies/ruby-1.9.3-p125/bin/ruby
- EXECUTABLE DIRECTORY: /Users/user/.rvm/gems/ruby-1.9.3-p125#rails3/bin
- RUBYGEMS PLATFORMS:
- ruby
- x86_64-darwin-10
- GEM PATHS:
- /Users/user/.rvm/gems/ruby-1.9.3-p125#rails3
- /Users/user/.rvm/gems/ruby-1.9.3-p125#global
- GEM CONFIGURATION:
- :update_sources => true
- :verbose => true
- :benchmark => false
- :backtrace => false
- :bulk_threshold => 1000
- REMOTE SOURCES:
- http://rubygems.org/
I have been going around with this for more than last two hours with no luck so far.