Economic Principles And Business Decision Reports Example

Introduction

The unrest that started in Egypt has spread to Libya causing well-founded fears of possible disruption in oil supplies. The price of gasoline increased over the last week to a national average of $3.51 per gallon. The falling of the prices of crude oil over $100 per barrel for the second time in history makes the analysts say that pump prices are likely to head higher. The Americans are currently paying 34 cents more per gallon of gas compared to when Libya crisis started. It is an increase of approximately 11 percent (McEachern, 2013). This paper analyzes the demand and supply of gasoline.it also analyzes the responses of the quantity demanded due to changes in gasoline price. In addition, the paper looks at the associated production costs, the pricing and the profits and losses associated. Economic Principles
The economic order for the quantity one is willing and ready to purchase dependent on many factors. Firstly is the income of an individual. People usually look at their earnings when deciding the quantity of a commodity to buy. The relationship between demand and income may not be very straight forward (Tucker, 2011). Items categorize as either ordinary or inferior goods. The quantity demanded of a normal good increases with a rise in income. The amount required of an inferior good decrease with a reduction in income (Dekkers, 2009).
Gasoline is an ordinary product and, therefore, increase in income will lead to an increase in the quantity demanded. For example, the building of 42000 miles of interprovincial express highway by China in 2020 creates employments thus increasing people's income (McEachern, 2013).
There is an anticipation that demand will arise as a result of more demand for gasoline. Secondly is the price (McEachern, 2013). It is the most fundamental determinant of demand as it is usually the first thing that people think about in making decisions about the quantity to purchase. Many of goods and services obeys the law of demand (Tucker, 2011). The law states that the amount demanded of a commodity decreases with an increase in prices and the opposite all other factors not changing.
It, therefore, means that the rise in price of gasoline will lead to a reduction in the quantity demanded. For example, June is the cheapest month for gas (Kroon, 2007). Motorists are anticipating not seeing the pump price moving up. The price of crude oil is unknown which has tremendous effects on gasoline price. The stockpiles of the crude oil rise reveal no call to oil price decline. The Barclay’s slashed forecast for prices predicted an increase in supply due to increased demand in 2016.thirdly is the price of related commodities.
People decide on what to purchase after taking into account the cost the similar products. The commodities can either be substitutes or complements. Gas has many alternatives for coal that is relatively cheap. If the price of such substitute is low in comparison to the gas, the quantity demanded of the gas will go down. Finally are the expectations (Tucker, 2011). Consumer’s demand of a commodity depends on what they expect in the future in line with the prices, income, and price of the related products and so on.
People expecting an increase in income today increases their current consumption (Kroon, 2007). For example, the Iranian oil cutoffs gas prices are increasing going beyond the $4 per gallon that threatens to break an all-time high time expert. There are fears of $5 per gallon gasoline in the motorists minds and, therefore, are purchasing much currently (Balitanas, 2011). Price elasticity of demand displays the sensitivity of the quantity demanded due to changes in price (Dekker’s, 2009). Gasoline has a relative inelastic demand curve due to the presence of few substitutes for purchasing gas especially in the short run (Tucker, 2011). For example, in the case where the price of a gallon rises from $1 per gallon to $1.10, it signifies a 10% increase in price. The demanded quantity falls from 20 to 19 gallons meaning a 5% decrease in demand.The resulting elasticity using the midpoint method is
The change in price is (1+1.10)/2=1.05=10%The change in quantity is (-20+19)/2=-0.5=-0.5% The price elasticity of demand involves the proportionate change in quantity demanded divided by the proportionate change in price.
It is given as 0.5/1.05= 0.5 ≈. In absolute terms. A 1% decrease of increase in the price of gasoline leads to the reduction in the quantity demanded by a half.
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Supply is the capacity of a good or service a provider is ready to provide the market (McEachern, 2013). Many factors affect the seller’s willingness and ability to produce and sell commodity (Tragakes, 2011). Such factors include the price of other related products (Kroon, 2007). They are of two types. If a producer changes from provision of gasoline to coal, the price of gasoline will fall and its supply will fall because it’s less profitable to produce it. In joint supply, rise in a product causes increase in the other. For example, an increase in prices of oil may lead to an increase in the price of motorcycles.
Therefore, the supply of oil raises since it’s more profitable. Secondly is the price (Tucker, 2010). If the price of a commodity rises its supply also increases (Dekker’s, 2009). The suppliers are willing to produce more of the commodity since there is motivational from the profits realized. For example at the end of 2007, the price of crude oil and gasoline adjusted to inflation. They were at levels seen in 1981 and continued to raise throughout 2008 (Tucker, 2011).
Europe received cushion in part from the developments because the dollar depreciated against the euro. Those forces that drove the price of gasoline up in US are still the ones experienced in Europe. Thirdly is the cost of production. Increase in cost of production makes manufacture of a commodity less profitable. As a result, the producers are discouraged from production resulting in reduced supply (Tucker, 2010).
Cost of production is either variable or fixed (Dekker’s, 2009). Fixed are those that do not change with the output. They include depreciation, the setup costs, and average profits. They also refer to as overheads. On the contrary, variable costs differ with output and are also referred to as direct expenses. They include fuel usage, raw materials, and labor costs (Tucker, 2011). Marginal cost is the additional cost due to a unit increase in the level of output.For example, the data below shows the costs in $ associated with gasoline.
The average cost per unit is minimal in the range of 450 and 500 output range. Beyond that range, the average cost per unit increases and thus it’s not economical to produce any more (Kroon, 2007). The profit maximizing level of output is between 450 and 500 units. In the short run, we expect average profits since the total costs incurred by the firm is inclusive of the shareholders’ interests. The average profit is therefore part of the total costs (McEachern, 2013).
The elasticity of supply using the midpoint point formula is as follows.Take the case of out levels 100 and 150 and their corresponding costs of 400 and 450 respectively.The supply elasticity using midpoint isChange in output = (100+150)/2 =125Change in cost = (400+450)/2=425The elasticity is therefore=125/425= 0.3.A 1% change increase in the prices increases the quantity provided by 0.3 units.

The supply graph

RecommendationsThe profitability of a business depends on many factors. Current increase in the prices of gasoline and the estimated increase in the future is not a guarantee of profits in case an individual ventures into such a business (Dekkers, 2009). I would not recommend Cousin Edgar idea of venturing into the gasoline industry with the hopes of making good profit. The corporate sector has so many risks and investing in two gas stations may have adverse effects on her. I would advise her to spend at list in one location and make a move later after testing the profitability. The demand and supply are not affected merely by the prices, but there are other factors as discussed above. She has to consider the cost of production and the expected returns before venturing into such a business. I recommend her not to invest or just invest in one station.

References

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McEachern, W. A. (2013). Contemporary economics. Mason, Ohio: South-Western Cengage Learning.
McEachern, W. A. (2013). Contemporary economics. Mason, Ohio: South-Western Cengage Learning
Tragakes, E. (2011). Economics for the IB Diploma. Cambridge: Cambridge University Press.
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Tucker, I. B. (2011). Economics for today. Mason, OH: South-Western Cengage Learning.