Elasticity / Production and Cost - Essay Example

Source: http://www.californiagasprices.com/retail_price_chart.aspx In order to see the effect of demand of gasoline on its price, it is necessary to choose the constant crude oil price at two different time periods. Above graph states that in July 2006 and July 2007 the crude prices were ruling at almost $77/barrel; however, gasoline price in 2006 was around $3.2 against the price of $2.75 in 2007. The lesser price in 2007 is linked to a reduced demand. A report published by state board of Equalization, California indicates that the consumptions in July 2006 and July 2007 were 1,342,789,429 and 1,331,618,442 gallons respectively.

(Gasoline Gallons 2009) Exercise 2 Any spurt in demand for potato chips and computer chips will have corresponding price implications but they will not exhibit same pattern in price movements with respect to its demand. a) The potato is an essential daily consumption item. At any given time, its price is linked to its demand-supply equilibrium. A large increase in demand of potato chips will spurt the demand of potato too. Any increase in demand for potato chips will surely increase the demand for potato and accordingly potato price will increase to form new price equilibrium.

While the increase in demand for computers will not exhibit same percentage price rise as exhibited by potato. This is due to different price elasticity of these products, which are inherently different in nature. b) In order to increase production, potato chips manufacturer need to cover up more raw material in the form of potato from the market; however, he may have to pay higher prices for the same as price elasticity for potato is higher. The computer manufacturer will also need to augment its raw material supply to increase the production and in a given setup and within certain production constraints, the computer manufacturer can always increase the production to meet the demand without any real increase in its component cost.

The computer components can be considered price inelastic. c) A long run for potato and computer chips has different meanings. Potato may have supply constraints and until next crop its supply may not be augmented and it is likely that price of potato remain at higher level in line with its demand. For the computer component manufacturer increased demand will not cause any increase in component price, all other things remaining the same, for its price are inelastic to the demand. Exercise 3 Sarbanes-Oxley Act was enacted in 2002 in response to several accounting scandals such as Tyco International, Enron, WorldCom and many more.

The act applies to all listed companies under the surveillance of Security Exchange Commission. Many call it an overly regulating legislation in the difficult market but the fact is that it helps check unethical behavior of the company officers. Thus, it increases the confidence level of investors in U.S. companies and in their financial statements. The compliance certainly increases the cost of the companies to a certain extent. The compliance cost is fixed in nature and cannot be called variable as it does not vary with the size of unit or production levels.

It is true that the companies with multiple segments or divisions will have higher cost compared to those with a single unit of the same size. The companies who comply with the regulation have certain benefits in the long run for their financial statements are more reliable. Shareholders, creditors and bankers would prefer to involve and transact with such companies. Higher