INDIVIDUAL ASSIGNMENT

ARTICLE

http://www.telegraph.co.uk/finance/oilprices/11817174/Petrol-prices-may-drop-below-1-a-litre-as-Britains-biggets-retailers-cut-prices.html

SUMMARY

Based on this article, fuel prices have been drop down below £1 per litre for the first time in over five years as Britain’s biggets retailers cut prices. “The cost of motoring this summer with the big four supermarkets now selling unleaded and diesel for considerably in these recent months”. said Rod Dennis. Due to the petrol prices drop, drivers should get cheaper fuel across the UK, with some retailers also proving to be fiercely competitive when it comes to prices. ASDA also has announced and promised drivers a “weekend boost” that will see them paying less than 109.7p per litre across all of its 272 service station. Since May, diesel prices have been decreasing because of increased capacity from Asia. Instance, Mr. Dennis said that the reason they’ve been slower to cut unleaded is because the wholesale price of petrol and the price buy from the retailers has not fallen at the same rate diesel has. Besides that, the latest reduction of unleaded fuel is 15p a litre, it is cheaper than last year’s August, making it less £7.50 to fill up a family car. The falling price in fuel is because the producers want their consumers do not spend too much for fuel in their daily life. The drop is driven by a global surplus in oil, caused by other major oil producers such as Arabia and Saudi. Thus, The international Energy Agency has predicted that the oil prices will continue fall with the new lower costs into 2016. At the end of article, they also mentioned that the fuel prices have involved government’s tax. There are three main of the microeconomics concepts that I found in this article, which are market equilibrium, elasticity and market structure.

MARKET EQUILIBRIUM

One of the main concepts in this article is market equilibrium, which defined as a situation in which the demand of an item is equal to its demand. (BusinessDictionary.com, 2015) Market equilibrium is the point where the supply curve and demand curve are touched each point and this market stated as equilibrium. This is a market occurs when the consumers and the sellers are willing to exchange the money for goods and services and do not changes in price, which means the quality supplied is totally equal to quantity demanded. Based on this article, Britain’s four largest retailers have predicted that the cost of petrol will continue fall into 2016. This will cause a decreases of supply curve in this market. It is because the less of profit that the producer can earn, the less of product that they will produce. Moreover, the supply curve will shift to the left, it shown as the graph below from S to S1. After the falling economics, the prices of the petrol will increases significantly. From the graph we can see, when the supply curve shift to the left, the equilibrium quantity demanded shift to the left while the equilibrium price of fuel is increase. Hence, the fuel corporation would probably not make more profits when the price of fuel is decreases. Since the producers have to pay more on the production cost of fuel, this is also one the reason they cannot make more profit. There are two major types of policy responses, which are government expenditure and tax or money and interest rate. The factor that affects the supply curve shift to the left is because the retailer cannot earn much when the price of the fuel is decreasing. There is not much affected in curve from Q1 to Q2 because fuel is a nessecity for eveyone who owns a car. Petrol is also an essential to the day to day using by the majority of consumers, even it is very expensive to the poor people.

* MARKET EQUILIBRIUM GRAPH

ELASTICITY

The following concept that I have chosen is elasticity, which is defined as the measure of sensitivity of changeable price and quantity demanded. As we know that inelastic products are usually called as necessties while elasitic are usually luxury items. (Definition of Price Elasticity of Supply, 2015) Besides that, fuel is a necessity product for all people and every family that owns a car, so in this article they having an inelastic of demand. Nowadays, most of the consumer still decide to drive a car instead walking or taking public transporation to school or any other places. Fuel has no close subsitutue goods. For an example, the increase in price of fuel in BHP and the PETRON will also increase. And also, the price of fuel are controlled by the government. There are so many factors that will affect the price elasticity of demand. First of all, the groups of income level of consumer. Generally, there are two types of consumer which are rich people and poor people. Rich consumer are not affected by the changes of the price while the poor consumer are hugely affected by the changes of the price. As the result, demand for poor comsumer is highly elastic. Morever, the consumer’s habits is also one of the important factors in this article. For an example, consumer will go to the fuel station that they always go such as SHELL or PETRON in Malaysia.

Other than this, the factor that affect the price elasticity demand of fuel is passage of time. Elasticity in the long run is higher than the short run. In addition, consumer might control the speed limit when they driving to avoid losing too much of fuel. There are so many ways to reduce the price of the fuel. Based on my research, many different type of vehicles will lose fuel easily if they drive at the higest speed. If they drive at slow speed, they can save over 20% cost of fuel in their daily life. Furthermore, one of the convenience way is to buy a hybrid car or move nearer to their study place or work place would help the consumers to save the petrol. Another way to decrease the fuel costs is consumers could ask friends or cousins carpooling to the same place instead of driving alone. It would help to save many of the petrol everyday.

MARKET STRUCTURE

Last but not least, the third concept that I found in this article is market structure. Petrol companies such as PETRONAS and Shell have only a few firms in Malaysia but they are large, they are doing the same business but different products in the market. I called this market structure as oligopoly. Oligopoly is a market that has highly concentrated in the market. Besides this, government is the one who set the price of fuel and the supplier are not the price setter in this market. It is hard to barrier to entry oligopoly market even though there’s a lot of fuel corporation is the market but there is only a few firm. Moreover, there have an advantage and disadvantage to engage in this business. Companies can generated the high profits and used for develop of new products. In addition, the disadvantage of the petrol corporation in this market is, the very small companies will be left with very little profits, and the impartial wealth distribution of the profits made by the major player only.

Based on the kinked demand curve of oligopoly, the model in this market is to look for protect and to preserve their market share. (Beta.tutor2u.net, 2015)

Besides that, in this model all the business might face a demand curve for its product based on reactions of other competitors to a change in its prices or other changeable. Furthermore, if a corporation rises prices, then the huge substitution effect will making demand relatively price elastic. And also, this will also cause the business would lose market share in its profit. A changes in marginal costs will also lead to fall or rise in the profit maximizing price and output such as a raw material prices increases and others factor that may lead this cause. There is also limited real world evidence in this model. As shown in the graph, the model of the kinked demand curve is very steady in the suggested price. Therefore, here is some of the evaluation of kinked demand curve. In real world, the prices of the products do change in ever condition. Corporation prefers to increase market share but not seek to maximize profits. Beside that, some of the firms such as SHELL and PETRON, they have very strong brand loyalty by the consumers.

*Kinked Demand Curve of Oligopoly:

REFERENCE LISTS

BusinessDictionary.com, (2015) What is market equilibrium? definition and meaning. Available from: http://www.businessdictionary.com/definition/market-equilibrium.html [Accessed 24 October 2015].

Consumerenergycenter.org, (2015) CONSUMER DRIVING TIPS - 10 Ways to Reduce Your Fuel Costs, NOW!. Available from: http://www.consumerenergycenter.org/transportation/consumer_tips/ [Accessed 24 October 2015].

Definition of Price Elasticity of Supply. (2015). Boundless. [online] Available at: https://www.boundless.com/economics/textbooks/boundless-economics-textbook/elasticity-and-its-implications-6/price-elasticity-of-supply-56/definition-of-price-elasticity-of-supply-215-12306/ [Accessed 26 Oct. 2015].

BusinessDictionary.com, (2015) What is an oligopoly? definition and meaning. Available from: http://www.businessdictionary.com/definition/oligopoly.html [Accessed 25 October 2015].

Economicshelp.org, (2012) Price Stability in Oligopoly | Economics Help. Available from: http://www.economicshelp.org/blog/5597/economics/price-stability-in-oligopoly/ [Accessed 26 October 2015].

Beta.tutor2u.net, (2015). Oligopoly - Kinked Demand Curve | Economics | tutor2u. [online] Available at: http://beta.tutor2u.net/economics/reference/oligopoly-kinked-demand-curve [Accessed 26 Oct. 2015].