INTRO
Edgar desires to review the business of opening a brand-new gasoline station. He must think about the costs of running it and the possible revenues he can get. This will assist to arrive at revenues expected. A positive expected profit will indicate a thumbs approximately the brand-new venture.
PERTINENT DETAILS
The article tells us the gas prices are expected to touch a high of $4. It likewise specifies that this high price has actually required consumers to squeeze non-gas spending and even cut down on gas intake.
‘the hike at the pump is beginning to push drivers off the road’. So we have rising prices and decreasing intake. This implies lower expenses by customers that implies lower incomes for gas station owners.
The article also mentions irregular materials that can play havoc with brief run materials. However high level of inventories are anticipated to keep rates lower than expected due to provide problems.
So we have a circumstance here high costs cause lower earnings due to lower intake levels.
This is seen in left shift in demand for gas. Larger capabilities and high stocks will affect materials- the supply curve may move to right/ remain steady. Both circumstances imply lower rates for gas, and more unpredictable incomes stream.
However the demand for gas is inelastic due to the nature of the good itself. This could imply that revenues do not dip as prices rise. However the prices of gas are very volatile, as seen in the past. This volatility is not a good sign for a stable revenue flow.
Also the inelasticity is coming under scrutiny as surveys show people changing their habits and lifestyle to reduce consumption, making demand more elastic than expected. An elastic demand is not good for business.
RECOMMENDATION
I would not recommend Edgar to start a new gas station. This is because of high level of uncertainty associated with supply of gas that determines its price as well as changing lifestyles and preferences that make demand more elastic.
The figure shows falling prices with decline in demand and abundant inventories. As lower prices translate into lower revenues when demand is elastic, we expect lower profits as well. The volatility in prices and therefore, revenues in another source of concern.
REFERENCE
- Lin, Cynthia, and Lea Prince b. “Gasoline Price Volatility and the Elasticity of Demand for Gasoline1.”
- Department of Agricultural and Resource Economics University of California, Davis, California. Web. 13 Oct. 2014. <http://www.des.ucdavis.edu/faculty/Lin/gas_price_volatility_paper.pdf>.
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