Good And A POOR Essential oil And Petrol Service Economics Essay

With mention of the case study, distinguish clearly between a good and a terrible service.


A good service is customer oriented. In the case research companies such as Tesco, that provide blended petrol give a good service. Blended petrol has a consistent price, is a renewable energy source, and reduces greenhouse gas emissions. On the other hand, companies offering petrol offer a bad service since the prices of fuel vary between areas and increases air pollution.

Question 2. With regards to the creation of either essential oil or bio-ethanol, make clear the principles of scarcity and opportunity cost.


The production of bio-ethanol requires resources such as corn, whole wheat, and maize. However, these resources are scarce, i. e. there are not enough of the resources to supply the US populace also to produce bio-ethanol. Thus, the development or the non-production of bio-ethanol raises the issue of opportunity cost. The opportunity cost of production is having less corn, maize, and wheat to feed the populace. The chance cost of non-production includes having less a clean atmosphere due to the consumption of oil, which is a pollutant.

Question 3. Explain why the price tag on petrol is normally higher in rural areas, such as North Western Scotland, than in cities.


There is an increased demand for petrol in rural areas compared to the urban areas. The rural area people travel longer by car and are usually more reliant on the automobile set alongside the urban populations. Additionally, the rural society is not dependent on the public means of transport as is the case in the urban areas. These factors improve the demand for petrol and so its prices. An increase popular drives up prices.

Question 4. Explain why the demand for petrol is price inelastic, whilst the cross-elasticity of demand for a make of petrol is high.


Despite the price of petrol, people use their cars. Thus, even doubling the price of petrol will not significantly influence the demand for petrol (Pindyck and Rubinfeld, 2008). This makes the demand for petrol price inelastic. Also, reducing the intake of petrol requires significant changes such as generating less, investing in a more fuel-efficient car, and using the general public means of travel. However, the cross-elasticity of demand for a brand of petrol is high because the option of petrol brands that are charged less than petrol leads to a shift popular from petrol to the cheaper replacement. For instance, a decrease in the price tag on diesel would lead to a switch to diesel autos.

Question 5. a] Draw a fully labeled diagram showing the effect on the demand for petrol of an increase in the price tag on diesel energy.

b] Clearly clarify the impact on the demand for petrol of a rise in the price of diesel petrol.


The increase in price of diesel from P1 to P2 will result to an increase in the quantity demanded of petrol from Q1 to Q2. The upsurge in the price contributes to a growth in the number demanded of the substitute good. Petrol and diesel are close substitutes and an increase in the price of diesel will lead to a rise in the quantity demanded of petrol. The price and volume demanded of substitute goods have a direct relationship.

Question 6 a] Get a fully tagged diagram to show the impact on the demand for diesel powered cars of an increase in the price of diesel energy.

b] Clearly clarify the effect on the demand for diesel powered cars of an increase in the price tag on diesel petrol.


Diesel and diesel powered autos are complimentary goods. For complimentary products, if the price tag on one product is increased, it leads to the consumers demanding less of the complimentary good. Thus, an increase in the price tag on diesel fuel from P1 to P2 will lead to a decrease in the demand for diesel-powered vehicles from Q1 to Q2. The price and quantity demanded of complimentary goods are inversely correlated.

Question 7 a] Do you take into account petrol to be a normal good or a substandard good?


Normal good

b] Demonstrate your answer to question 7a].


The number demanded for normal goods increase with an increase in income (Mankiw, 2008). The quantity demanded for petrol is likely to increase once income boosts and vise versa. A rise in income will lead to more people purchasing automobiles. This may lead to an increased demand for petrol. The income elasticity of demand for petrol is positive. Usually, if the number demanded for petrol declines with a rise in income, petrol would be a substandard good.

Question 8 a] Make clear how an petrol company might raise the supply of oil in the short-run.


The supply of oil is inelastic in the short-run as a result of significant costs of development. Once an essential oil field has been created, the expenses of operating the field continue to be significantly the same regardless of the capacity of operation. However, if the prices of oil upsurge in the short-run, the olive oil companies may increase the supply of essential oil because the marginal costs of production become insignificant.

b] Demonstrate the effect on short-run costs of increasing supply in the short-run.


An increase in the way to obtain petrol in the short-run brings about a rise in the marginal costs of creation. The amount of oil offered in the short-run depends on the ability of the price increase to pay the marginal costs.

Question 9 Explain the income maximizing end result of a company in the petrol source industry.

The company maximizes its profit at the point where MC=MR. This implies that the organization will continue steadily to increase its creation of oil before point where forget about income can be generated (Mankiw, 2008).

Question 10 a] Which market framework do you believe best describes petrol retailing in the UK.


Non-collusive oligopoly

b] Clarify your response to question 10a].


A small number of oil stores characterize the market. The market is a high-volume, low profit margin implying a variation in price by one company affects the profitability of the other organizations.

c] Identify one technique that a petrol-retailing organization might choose when fighting with other petrol retailing businesses.


A reduction in prices

d] Explain advantages and disadvantages of that strategy.

A small discount on the purchase price that is proposed by the other businesses in the oligopolistic market will lead to an increase in the sales of the firm offering the discount. The downside of the strategy would be that the other firms on the market are likely to follow suit and reduce their prices. This contributes to Bertrand-Nash equilibrium where in fact the long-run outcome is the fact the whole market are affected a reduction in prices (Krugman and Wells, 2004).

The companies can also contend on amounts. If a company raises its quota of creation, it will in a position to capture a more substantial market than the competing businesses. However, it will lead to Cournot-Nash equilibrium when other companies choose the same strategy (Krugman and Wells, 2004). An increase in prices reduces the prices on the market and firms are affected a reduction of prices.

The use of petrol as a gas for cars creates market failure by means of externalities.

Question 11a] Explain why overlooking the externalities can lead to the over-consumption of petrol.


The ingestion of petrol produces externalities such as pollution and traffic congestion. If these externalities aren't contained in the prices of petrol, the price tag on petrol won't reflect the total cost of production. Thus, in a competitive market, the lifestyle of un-priced externalities on the market will cause under charges of oil and its own succeeding overconsumption.

b] Clarify how ONE policy device can reduce the forex market failure.

Market-based tools are among the list of policy steps used for lowering market failures. The strategy employs costs and other economical variables to offer incentives for the reduced amount of negative externalities. The method seeks to eliminate market failure brought on by negative externalities by incorporating external costs of utilization and production. That is done through various means such as taxation, charges on products, establishing property protection under the law, and establishing substitute markets for the consumption of environmental services.

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