November 16, 2013 Professor Deniz Demiray
Planning a business entails knowing the nuts and bolts of the things that goes around it besides knowing the trend in the market, the pool of customers, the challenges attached to it, and the potential risks to the business. Gas is an essential commodity in the market that has created controversial issues each time there is a price change (www.ehow.com). This paper will present a business proposal proposing gas as its commodity. It will review on the market structure, the elasticity of demand and supply for gas, present the fixed and variable costs, marginal cost and marginal revenue, and suggest non-pricing strategies for gas as a sample commodity.
Market Structure The gasoline industry is an oligopoly market structure. The market is dominated by a small pool of sellers. The decisions of the producers are interdependent of each other’s decisions. It is vital for the firm to consider the responses of the consumers how they react to the pricing because that will set the trend or equilibrium based on the Law of Demand.
The Law of Demand
In the Law of Demand, as the price of gas increases, consumer demand for gas will decrease. But all factors will remain constant. If the purchase of gas falls, the consumers will have frequent trips to the gas stations. It is a relevant concept that as the price of gas increase, people will lessen their trips to the gas station. Therefore, setting the price to a lesser than or within the average price in California will help increase the revenue.
The Law of Supply The Law of Supply pertains more to the advantage of the firm as the producer. It is the producer’s intention to make a profit in the business. At a lower price of gas, only the most efficient producers can make a profit and are willing to sell goods. At a high price, even the high cost producers can make a profit. It all depends on what the market are willing to pay and patronize.
The Elasticity of Demand The average price of gas per gallon sold was $4.029 on Nov 6 and $3.978 on November 13, 2013 (energyalmanac.ca.gov/gasoline/). The number of gallons sold respectively was 9,000 and 10,000.
Determining the coefficient of elasticity of demand is:
Ed = Percent change in quantity Percent change in price (University of Phoenix, 2010).
Therefore, the coefficient of elasticity of demand in gas is – 8.26
The result with an absolute value of 8.26 or 8 means that the demand for the product is elastic and the total revenue increases when price decreases. The gas price of the company is relatively elastic when price was reduced from $4.029 to $3.978. Since the demand for gas is elastic, the company will continue to increase revenue by lowering its price. It will be beneficial to the company to sell gas at the cheaper rate to attract more customers in the market. For every increase in the quantity sold to the customer, the marginal cost decreases and the marginal revenue increases. This is occurs when the breakeven point has been reached. Variable costs are the marginal costs, which included salary, inventory of supplies, and some of the estimated fixed costs.
Fixed and Variable Costs It is imperative for the firm to maximize profit to stabilize the business in the market. This can be attained by a maximizing the profit and minimizing loss by decreasing the total fixed and variable costs (www.economics.fundamentalfinance.com) The fixed cost includes the capital funds to start the business. These variable costs include the salary of workers, inventory of supplies,