The Future of Business The Essentials - Case Study Example

Introduction to Economics 1. A good is a tangible object which we can touch, smell, or taste and its ownership is transferable from seller to buyer. On the other hand, a service is intangible and the ownership cannot be transferred to the consumer. Therefore the consumer gets only a utility or satisfaction from the consumption of a service. In the given case, petrol is a good which is tangible and is transferred to consumer. At the same time, the petrol station provides service to a buyer as he/she gets the good- petrol. 2. Opportunity cost or implicit cost is the cost of lost benefits that could be achieved only from that particular opportunity. Bio- ethanol is extracted from refining agricultural crops such as corn, maize and wheat and it uses some scarce resources like manpower and agricultural land for its production. Even if the biomass for the production of bio-ethanol can be obtained at free cost, nothing is free in the sense of economics and the consumption of biomass involves an opportunity cost. Although biomass is a renewable resource, it is scarce; and efforts as well as cost are included at its base for its preservation. Hence it is necessary to value these primary implicit factors. Similarly, if the usage of biomass is substituted for other applications such as heat energy or power production, it may get an economic value which is considered as the opportunity cost for bio- ethanol production. 3. The price of petrol in rural areas like North West Scotland is generally higher than that of urban areas. The price of the petrol is generally determined by four factors such as Refinery cost, Duty, Margin, and VAT. The three factors except ‘Margin’ would not vary according to regional changes. So, wholesaler’s and retailer’s profit margin is the constituent which causes differential price rates between urban and rural areas. As per the findings of The Scottish Parliament information Centre (1999), Since North West Scotland is a remote area and characterized by poor roads, petrol transportation to this region incurs a huge cost and which drives the intermediaries to fix a higher margin. Similarly the local petrol stations realizes comparatively much smaller turnover and thereby they are forced to set huge margin in order to drive their venture upward. In addition to this, intense competition in urban areas causes the diminution of profit margin by around 9% which also increases the price level gap between urban and rural sectors (Rural Petrol Prices pp.4-5). 4. Since most of our energy needs are met out of petrol and there are no close substitutes for this fuel, we would buy petrol regardless of the price changes. This necessity keeps demand for the petrol price inelastic at any price level changes in crude oil industry. On the other hand, cross elasticity of demand accordingly vary with price level changes. So, if the price of one brand of petrol is increased; consumers can switch their demand to another brand of petrol which will satisfy their needs almost at the same level of the previous one. 5. Demand of petrol Vs Price of Diesel The price increase in diesel is shown along the X-axis whereas the Y-axis reflects change in demand of petrol. From the graph it is clear that demand of petrol increases with an increase in the price of diesel. There are only 8100 consumers for petrol when the price is of diesel is at 120p. As the price of diesel increases from 120p to 126p, there is a consequent increase of petrol consumers from 8100 to 9900. This diagram clearly illustrates the cross elasticity of demand. 6. Price of diesel Vs Demand for diesel powered cars This graph points out the fact that price of diesel is inversely proportional to demand for diesel powered cars. There are 1900 users for the diesel powered cars when the diesel price is at 110p. It is decreased to 1500 with an increase in diesel price by 5p. When the diesel price reached at high level (125p.), the car users weakened to only 1000. It is happened because diesel powered car is not a necessary product. 7. I think petrol is a normal good. In the case of inferior goods, its demand decreases as consumers’ income increases. On the other hand, demand of the petrol is directly proportional to income of the consumers. Hence, a rise in consumers’ income causes a consequent increase in demand for petrol. 8. In order to increase the supply of goods there must be increase in demand too. Price reduction is the best method to increase the demand of oil and thereby supply in the short-run (Maxprep CA-CPT 2008). However, sellers must be willing to fix a comparatively small profit margin in order to confront with competitors. Similarly, employees’ wage increase is another technique to increase supply of oil. Wage increment will motivate employees and they will put maximum efforts which will amplify the supply of oil. Even though, price reduction is an appropriate tool to increase the supply, it may have some adverse effects in future. To illustrate, it would reduce the profitability of the seller because of the smaller margin. The further price rise after gaining market dominance will be a cumbersome task for the seller as it is against the buyers’ expectations. Buyers would switch their demand to substitutes as soon as the company increases the oil price. Similarly, high wage payment would also promote employees’ expectations on further increment which the seller cannot often accommodate. 9. A firm in the oil supply industry fixes profit maximizing output by which it gets a clear idea about the quantity to be produced in order to get the desired output. The oil supply retailer assesses various costs associated with attainment and storage of the oil. Then he/she estimates the revenue and compare it estimated costs. It enables the oil firm to compute the quantity of oil to be supplied in order to get the desired turnover or profit. 10. Perfect competition market structure best describes petrol retailing in UK. As Gitman and McDaniel (2008) state, the UK oil market is characterized by a large number of firms that sell almost similar products and the buyers have good information about the product. Similarly all these products are close substitutes to each other; hence above is the best fitted market structure (ibid 2008, p.24). Likewise, a firm must notice to maintain lower prices while competing with other petrol retailing firms. Since all petrol retailing firms sell the same product, product price is the only criterion that a customer can depend to differentiate the sellers. The fixation of a lower price enables oil retailer to increase the demand for his product (Mathur & Kenyon 2007, p.53). Since petrol is not a luxury product, price reduction will not cause to decline its demand. Similarly consumers always wish to acquire the necessary products such as petrol at low price as possible. In addition to this, this strategy also helps to unnerve the competitors since their turnover diminishes. Although it is the best fitted strategy in a pure competition market, it has also some severe effects as we described above. It would restrict the company from further price increment and hereby decrease the firm’s profitability. In addition to this consumers might become sceptical about the product quality due to the lower price level. 11. In economics, externality is the implicit benefits or costs associated with a product but it is not reflected in the market price of the commodity. In the petroleum industry, mining process produces air pollution which imposes a cost on the whole society. In order to cover the impacts of negative externalities, government imposes environmental tax on the product which increase the private cost of sellers (Externalities- Government Policy Options). If these externalities are ignored, petrol will be available at a lower price and consumed more lavishly. ONE policy instrument is intended to save the seller from negative externalities associated with a product. Certain strategies have been formulated under ONE policy instrument in order to reduce the impacts of environmental taxation. As a result of these strategies, smaller prices are imposed on the ultimate consumers which in turn will attract more consumers. References “Externalities- Government Policy Options”, n.d., A2 Markets & Market Systems, accessed 28 Nov 2010 from http://tutor2u.net/economics/revision-notes/a2-micro-externalities-policy-options.html Gitman, LJ & McDaniel, C 2008, The Future of Business :The Essentials, 4th edn, South-Western Cengage Learning, USA. Mathur, SS & Kenyon, A 2007, Creating Valuable Business Strategies, Butterworth-Heinemann, UK. Maxprep CA-CPT 2008, Basic Reference Material, General Economics, Tata McGraw-Hill, New Delhi. “Rural Petrol Prices” 1999, The Scottish Parliament, The information Centre, Accessed 28 Nov 2010 from http://www.scottish.parliament.uk/business/research/pdf_res_notes/rn99-52.pdf Read More