Today, gas prices in Chicago off my exit for work are $3. 99 a gallon for unleaded gas at the Marathon gas station at the corner of South Blue Island Eve and Western Eve (Gas Prices in 60608 Zip Code, Gasbag’s). That is 50 cent savings per gallon. If I just filled up 10 gallons, which is a savings of $5. It doesn’t sound like much, but used to fill up twice a week on my about 46 mile commute to work. For the month, that would be an estimated savings of $40 if I do not use my vehicle for anything else but work.
Now my cousin Edgar, who is always thinking about the next get rich scheme, is thinking bout possibly opening up two gas stations.He believes that he will make a good profit if he also sells convenience items at both of his gas stations. He found out I was taking this Economics course and figured would be happy to help him research his idea of opening two gas stations in the area.
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I wasn’t too thrilled, as he always is trying to find get rich quick schemes, but this actually seemed like a legit prospect and it sparked my interest. Not that am thinking about opening a gas station, but just what entails the gas industry. Mean, gas prices vary greatly by states, taxes, neighborhoods, and competition.
Gas prices changes every day and even twice a day because oil and gas prices fluctuate. Gas prices seem to be the one of the most fluctuating and variable prices that we deal with. Gas prices may suddenly and dramatically go up one day, after being somewhat constant for a period. The final gas price per gallon includes crude oil prices, refining costs, distribution costs, marketing costs, and federal, state, county, and local taxes. Gas prices also fluctuate because of oil supply disruptions, refinery disruptions, political factors, demand, and world conflicts like the Ukraine Crisis, Gaza Strip bombings, and now ISIS terrorists in Syria.Demand Determinants In economics, demand is defined as the goods and services people are willing and able to buy during a certain period of time at various prices, holding all other relevant factors constant (page 70, R. G.
Hubbard, & A. P. O’Brien). So, in our case the demand in motor gasoline has been touchy. As gas prices go up, demand should go down, and vice versa, when gas prices go down, demand should increase.
The Law of Demand basically demonstrates the relationship between the price of a product, and the quantity the consumers demand on that product (page 71, R.G. Hubbard, & A-p. Cobber). Currently, the days of gas guzzling giant Subs and Hummers are gone, now comes the age of more fuel efficient vehicles and more compact vehicles. Hybrid vehicles are displaying strong numbers as consumers are trying to rely less and less on fuel.
Some hybrid vehicles have demonstrated up to a 50% fuel reduction (6th paragraph, C. Johnson). For example, I used to drive a 2000 Chevy Impala that held about 17 gallons of gas, which I used to fill up twice a week and that was only going to and from work. When gas was under $3. 0 a gallon it wasn’t too bad, but when gas prices sky rocketed in 2011 to over $4. 00 a gallon is when it really hurt.
On average was doing about $140 a week for my јice fill ups for my impala, or about $560 a month on gas! Well after several car issues, I decided it was time to get another car. Gas prices had a huge impact on my next car. I purchased a hybrid, and have cut my gas spending in half. If this trend keeps goings, that means the demand in gasoline will also decrease. Consumers, including myself, are scared of the possibility of those $4. 0 for a gallon of gas will come back.
This will have an impact on my cousin and his idea of opening up a gas station. When gas prices jump up, consumers tend to cut back on everything including driving to UT back on how much they spend on gasoline. In the chart below of the 60 month or 5 year average retail price of gasoline prices of Gary, Indiana, which is the nearest city to us. It displays the extreme up and downs of gas prices. We have not seen under $3. 00 for a gallon of gas since 2010. (2014, Gaudy) According to EIA, an independent Static and Analysis for the U. S.
Energy Information Administration, the current 2014 demand in the United States for motor gasoline for the sales type of sales to end users, which is us the consumer, for the month of January 2014 was 17,945. 5 thousand gallons that were sold per day. For the month of February 2014, 18,451. 6 thousand gallons were sold per day.
For the month of March 2014, 19,417. 2 thousand gallons were sold per day. For the month of April 2014, 20. 109.
1 thousand gallons were sold per day. For the month May 2014, 20,403. 3 thousand gallons were sold per day. For the month of June 2014, 20,711. Thousand gallons were sold per day. I graphed the information below, and it seems like there was a steady demand in motor gasoline in the first 6 months of the 2014 year. Comparing the month of February to January, demand rose 1. 02%.
For March compared to February, demand rose 1. 5%. For April compared to March, demand rose 1.
04%. For May compared to April, demand rose 1. 01 For June compared to May, demand rose 1. 02%.
Or according to EIA, sold by grade (Thousand gallons): Price Elasticity of Demand First of all, what is price elasticity of demand? Rice elasticity of Demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the produces price (page G-6, R. G. Hubbard, & A-p. O’Brien).
The factors that affect price elasticity of demand are passage of mime, luxuries versus necessities, availability of close substitutes, definition of the market, and share of the good in the consumer’s budget (page 1 79, R. G. Hubbard, & AP. O’Brien).
R. G. Hubbard and A. P.
Cyprian state the formula for measuring the price of elasticity of demand is: Price of elasticity of demand = Percentage change in quantity demanded / percentage change in price. And Midpoint formula for Price of elasticity of demand = (Q – IQ)/ (IQ +Q/2) (Pl + PA/2) First thing is to calculate the average quantity and average price for the demand curve Del. I am going to have to guess and estimate how many loans of gas where sold a day in Merrill’s, Indiana, and for the price per gallon, used the high and low price per gallon for September 2014 from Gasbag’s (the chart is located in the addendum).Let’s say the Average quantity sold a day for the month of June: Average quantity = 12,000 + 18,000/2 = 15,000. Now the Average price in Gary, Indiana for September 2014: Average price = $3.
49 + $3. 59/2 = $3. 54. Now calculate the percentage change in quality demanded and percentage change in price for demand curve Del: Percentage change in quantity demanded = (18,000- 12,000/ 15,000)*1 00 = 40%, Percentage change in price = ($3. 9 – = -2. 82%. Then divide the percentage change in quantity demanded and percentage change in price to calculate price elasticity of demand curve Del : price elasticity Of demand -14. 18.
O elasticity is greater than 1 in absolute value, Del is elastic between those two prices. We now have to calculate the price of elasticity of demand curve DO. Will again have to guess and estimate how many gallons of gas where sold a day, and for the price per gallon, use again the prices from Gasbag’s. Percentage change in quantity demanded (1 5,000 – 12,000/ 1 22%, Percentage change in price = ($3. 49 – = -2. 82%.
Known can calculate the price elasticity of demand curve DO: Price elasticity of demand = 22%/-2. 82% = -7. 80. So again elasticity is greater than 1 in absolute value, DO is elastic between those two prices.
Graphing the Demand Supply Determinants In Economics, supply is described as the schedule of quantities of a good and service that people are willing and able to sell at different prices (page 79, R. G. Hubbard, & A. P. O’Brien). The Law of Supply states that “all other things being equal, price and quantity supplied are directly related” (page 79, R. G. Hubbard, & A.
P. O’Brien). So to put it in simpler terms, that when prices increase, sellers would like to provide more quantities of their product, and when prices fall, sellers would provide less quantities of their product or put a limit on how many the buyer can buy at the lower price.Now the question is where does the Elicited States get it gasoline from? According to C. Plaintiff from NAP, the United States actually gets the most oil from the United States. Actually the US produces 388% of its own oil, and getting 19. 6% of oil from Latin America, and 15.
1% from Canada. Now used to think that we still received most of our oil from the Middle East, when actually the Persian Gulf only provides 12. 9% of our oil, and 10. 3% from Africa, which surprised me, as didn’t think Africa as an oil producing country. La, an independent Static and Analysis for the U.
S. Energy Information Administration, for the period of June 2014, the LOS supplied Crude oil & petroleum products: Field production 347,275 thousand barrels, renewable fuels and oxygenate plant net production 32,655 thousand barrels, refinery blender net production 605,405 thousand barrels, imported 264,460 thousand barrels, and adjusted 16,030 thousand barrels. It exported 124,685 thousand barrels, products supplied 64,991 thousand barrels.
From the Energy Almanac, an example of the breakdown of the price of one gallon of gas based on producing one barrel of gasoline from one barrel of crude oil is: Variable: Distribution cost, marketing costs, and profits: $0. 25 Crude oil cost: $2. 36 Refinery cost and profits: $0. 32 Fixed (until laws and taxes change): State underground storage tank fee: $0. 02 State and local state tax: $0. 08 State exercise tax: $0. 45 Federal exercise tax: $0. 18 Total retail price of one gallon of gasoline: $3.
67 Gas prices are set based on what the barrel is trading at, and then that price s passed onto the consumers.It is estimated that the profit margin per each gallon of gas sold should fall within an estimated range of 30 to 60 cents per gallon (14th paragraph, P. Calorie). Now how my cousin can maximize profit in a competitive market, is by adding what he would want to profit per gallon, add it to the retail price, but at the same time still stay competitive.
In 2013, there were 109,970 gas stations with convenience stores in the US, with sales of 266,814 million (page 98, Reports: Worldwide Gas Stations with Convenience Stores).There was an increase of 1. 4% in establishments, and . 2% in sales compared to 2012 (page 98, Reports: Worldwide Gas Stations with Convenience Stores). Profit Minimization is when Marginal Revenue = Marginal Cost Or is also known as the break-even point (page 406, R. G.
Hubbard, & AP. O’Brien). Loss Minimization is a firm experiences a loss because price is less than the average total cost, so total revenue is less than total cost, therefore the firm has losses (page 407, R. G. Hubbard, & A.
P. O’Brien).Price is determined by trying to get price as close as possible to the profit minimization point or break-even point. I will be using my own estimated figures to illustrate an example of profit minimization and profit minimization. The profit minimization sis gallons because the Marginal Revenue is the closest to Marginal Cost without going over. Loss minimization would have to graph to find exactly where it would fall. I believe that the gas station should expect a loss because at 4 gallons, price of a gallon Of gas is $3.
49, and TACT is $8. 75. So that means that p < ATC.
Gallons Total Cost (ETC) Fixed cost (K) Variable Cost (PVC) Bag Total Cost (TACT) Bag variable cost (PVC) Marginal Cost (MAC) 11 10 20 26. 5 16. 5 13.
25 8. 25 22 10. 67 7. 33 35 25 .
75 6. 25 6. 2 55. 5 45. 5 9. 25 7. 58 14.
5 7 72 62 10. 29 8. 86 8 93 83 11. 63 10. 38 21 9 119 109 13. 22 12. 11 26 Price Elasticity of Supply Price Elasticity of Supply is the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price (page G-6, R. G.
Hubbard & A. P. O’Brien). The factors that affect price elasticity of supply are availability of raw materials, inventory, production capacity, time to respond, and complexity of production (page 190- 191, R. G. Hubbard, . P.
O’Brien). R. G. Hubbard and A-p. O’Brien state the formula for Price Elasticity of Supply = percentage change in quantity supplied/percentage change in price. And Midpoint formula for Price of elasticity of Supply = (Q – IQ)/ (PA (IQ + Q/2) (Pl + PA/2) Again we need to calculate the average quantity and average price for the supply curve SSL.I am going to have to guess and estimate how many barrels of gas where supplied a day in Merrill’s, Indiana, and for the price per barrel, used the high and low price per barrel for September 2014 from quantity supplied a day for the month of September: Average supplied ? ,000 + 1,500/2 = 1,250.
Now the Average barrel price in Gary, Indiana for September 2014: Average price $94. 50 + $91. 00/2 $92. 75.
Now calculate the percentage change in supply provided and percentage change in price for supply curve SSL: Percentage change in supply provided = (1,500 – 1,000/ 1 40%, percentage change in price ($91. 0 – O -3. 77%. Then divide the percentage change in supply provided and percentage change in price to calculate price elasticity of Supply curve SSL : Price elasticity of supply = = -10.
61. So elasticity is greater than 1 in absolute value, SSL is elastic between those two prices. We now have to lactate the price of elasticity for supply curve SO. I will again have to guess and estimate how many barrels of gas where sold a day, and for the price per barrel, use again what used above. Percentage change in supply provided = (2,770 – 2, 1 00/ O 28%, percentage change in price ($91. 0 – $94.
50/$92. 75)*100= -3. 77%. Now we can calculate the price elasticity of supply curve SO: Price elasticity of supply = 28%/-3. 77% = -7. 42. So again elasticity is greater than 1 in absolute value, SO is elastic between those two prices.
Graphing the Supply The black dot is the break-even point or profit maximizing level of output. The gray shaded area between MAC and TACT is the loss minimizing level of output. Recommendation What I would recommend to my cousin Edgar, is that opening a gas station doesn’t guarantee that it will be a success.There are many factors that will affect his success. Crude oil is a commodity and prices are not set by the establishment, they are set by the market and what it is trading it. Currently it is a necessary commodity that if you have a vehicle it is extremely necessary.
Even if you take public transportation, gas prices would still affect the consumer, because if gas prices remain high after a certain period, you know hey will request a price increase adjustment for bus passes and single trips. Now how much the consumer uses is all up to how much the consumer wants to spend or adjust their budget.Gas prices fluctuate from one day to the next and is never a set price. For example, if want to get to work and I am low on fuel in my car, have to fill up on gas regardless on the price of gas.
Could search around to try to locate the lowest priced gas in my area, but by doing that you also waste precious gas. I would have to adjust my budget to either lower it or cut something out that isn’t necessary. Instead of Aziza every Friday, I would have to cut back to every other week or none at all. Not many consumers have the luxury of not using gasoline at all.
Gasoline is used in many different gas powered tools, and in the farming industry. Would suggest he start off with opening one gas station with a convenience store in a high population and high traffic location, with minimal competition or rural location close to a highway where the closest gas station is some distance away. Newer vehicles are more gas economic, but they still need gasoline to make them run. Yes there are electric cars out now, but their active factor is that they are more geared towards local commutes than distance travel, as they can only run so many miles on a full charge.