economics of business enterprise - copy - copy

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ASSIGNMENT-ECONOMICS OF BUSINESS ENTERPRISE

(ADBM MODULE ASSIGNMENT)

ADBM- ESA -146P

NATIONAL INSTITUTE OF BUSINESS MANAGEMENT

ADVANCED DIPLOMA IN BUSINESS MANAGEMENT (SATURDAY)



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Table of content

1. Introduction to the product

2. Methodology

3. Theoretical background

4. Data collection and construction of the

demand equation

5. Conclusion



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ECONOMICS OF BUSINESS

ENTERPRISEGROUP ASSIGNMENT

PRODUCT:

LITRO GAS LANKA

Decide the target market on LITRO GAS PRODUCT and estimate demand equation using

quantitative techniques.



4

Group Members:

Name Class

W A D DILAN ADBM-ESA-14.6P – 11

G.PRADEEP ADBM-ESA-14.6P-56

NAVEEN ADBM-ESA-14.6P –MADUSHANKA ADBM-ESA-14.6P-

Introduction: product history on view of supplier and consumers

Litro Gas Lanka limited was taking place on 15th

Nov 2010, during the course

of the years the Company has invested in developing the Liquefied Petroleum

Gas (LPG) market in Sri Lanka.,

LP GAS system(product is also available in another form to consumption)

LP GAS system is successfully introduced by Litro GAS Sri Lanka (Previously known as Shell GAS)

and it was rapidly increasing in the Sri Lankan market share. Customers are provided individual

metered supply of LP GAS through a piped network. This type of service eliminates the needs

for individual cylinders. In a reticulated system LP GAS is storage at central storage supplies

through distribution pipes to each household.



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In this research we only look into the cylinder 12.5kg {sometimes back

13 kg}

The History

The first GAS usage of Sri Lanka was found as 1872. The Colombo GAS and Water Company

limited was established in Colombo city limit area up to Rathmalana and GAS provided via pipe

line.

After Colombo GAS company was established on 8th of Sep 1992, so that continuously supplying

Liquid petroleum GAS to Sri Lanka.

In 1995 Government owned Colombo GAS Company was privatized as Shell GAS Lanka limited.

The company was joint venture where Shell GAS acquiring 51% and Government of Sri Lanka

retained 49% of shareholding.

Litro GAS Lanka Limited was performed once shell GAS decided to sell 51% of shares in Sri

Lanka in November 2010. With that sale product name was renamed as “Litro GAS”. The

company was engaged with Importing, Storing, and Marketing, Filling and selling in the Sri

Lanka market.

Litro Gas is the largest imported LP Gas in Sri Lanka which has the capacity to cater to the LPG needs of

the entire Island and overall demand through an island wide network.



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Market Segments:

1). Domestic house holder market

The largest market segment in the Sri Lanka is Domestic house holder market. It supplies

through Domestic and retailer network.

The Domestic customers are usually used 12.5 kg and 2.3 Kg LP Gas cylinder which supplies low-

pressure regulator; with durability of cylinder you may use the tank for life time. You can

consume the product by using home delivery service.

2). Single large cylinder for commercial purpose.

This is refers to as “cylinder bank”. The customers supplies cylinders via distributors. The

maintainers carried out by the filling plant when retuned to refilling.



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Lirto gas has complementary goods like cylinder, hose, cooker for domestic usage it is must

complementary

Substitutions for gas litro gas in broad minded view are kerosene, bio gas, electric stove etc.

The Product Back Round On Perspective Of Marketing O Market

Product background on perspective of marketing on market where supply and demand meet.

Product penetrates market through island wide 2100 networks.it is main supplier lirto limited is

located in Colombo from where it offers lirto gas for domestic usage consumption all over sri

lanka.

Foreign Crude Oil Market

Imported By Litro Gas Ltd Supplier/Reseller

Plenty Of Gas Agency/Points Of Sales (Consisting Of Companies, Individual Business Firms)

Demand Out Of Nearly 20.675mn.(1.8 million domestic consumers data recorded newspaper

2011 included laughs)

Areas Of Density In Which Lirogas Usage Consumed By Consumers Like Household (Ignored

Commercial Usage, Industrial Usage.)



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Area

selected



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Infogarphic

litro gas

limited

points ofsales

domesticconsumers

domesticconsumers

domesticconsumers

points ofsales

domesticconsumers

domesticconsumers

domesticconsumers

points ofsales

domesticconsumers

foreign market

lirto ltd

points of sal



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Methodology Aspects:

Targeting Selected Area

1. District Wise

• Colombo

i. Malabe

ii. Wellawatta

iii. Maharagama

• Gampaha

i. Ragama

Choosing consumers on above selected 4 areas

Sampling based on consumer’s income and consumption – 10 families from each areas

I. Malabe

II. Wellwatta

III. Maharagma

IV. Ragama

Interviewing and submitting questionnaires for the selected families

I. Targeted domestics consumers

Receiving the feedback from submitted questionnaires and Converting quantitative

data collected into demand theory to draw demand curve

Secondary data have been used at some places to combine with factual data



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Assumption limited to consumers

1. It is considered to be domestic consumers only (ignored commercial users)

2. It is also assumed that @ selected families are only using 12.5kg cylinders (in reality

people buy 2.5kg for pre stock used when 12.5 is getting over)

3. Consumers are regular consumers who own their own cylinder so that they don’thave to pay for cylinder when buying (otherwise price would vary from person to person

for paying price for new cylinder).

4. Delivery charges are excluded for being a mini cost for consumers and also at times

consumers are direct purchaser without placing delivery order

Assumption is made at some places, as it is needed to limit the factors to make the research

simple. Economic theory are made on assumption at most time (to mathematically prove it)

Assumption is constructed with help of conditions like adding assumed figures, averaged figures,

omitting some big data, assumingly designed graph, approximation of fact numerical data and so

on.

Out of all districts, areas we learn are Colombo, gampha

gampha

40 people sample

colombo

Sampling method simple random out of population that is domestic users of litro but data of total

user this area is not calculable so that population is N

2 districts



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Making sample with assumption of all other districts use comparatively more less or little less

than litro gas

Distribute as per consumer density

Assumption made for this were all population use into domestic usage consumption and gampha,

Colombo has most supplier since both areas have most population

Ares being sampled with assumption of all other districts use comparatively more less or little

less the lirto gas on domestic usage consumption

Theoretical back ground

Sri Lanka is free trading country with rule of no- boundary for import; export for government

allowed products from both parties related .litro gas comes under imports on trade balance of sri

lanka. litro gas is one of government tax imposed product.

Prices of lirto gas in Sri Lanka is depending more on international crude oil market, government

tax and little on local demand. Sri Lanka is not gas manufacturing country so that it is revealed

that a country needs to be manufacture of product to be an excess producer that affects a demand

and prices in local market inside. Country is not willing to buy excess product than it requires.

This means that sri Lankan government allows gas companies to do the importing as per country

demands. Supplier normally sells as demands ask. Over period of time ended there will be total

supply and demand as a whole for country

It is a monopoly market in Sri Lanka when it comes to lp gas -litro domestic usage. litro is highmarket share holder compared with it only competitor laughs unknown but accepted factual is

market penetration is higher for litro lp gas ,prices also same compare with substitution laughs

gas. Since government gets revenue from both.



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Market structures in which litro gas falls into is monopoly (assumption that litro gas is strong

relation with domestic consumption than related substitution product laughs also 75 percent

market share (data taken from Sunday observer news 2011).the only controller that must be

powerful to control price over litro gas would be government

Monopoly has following conditions

1. A Single firms control the total market supply of the market

It is fit for litogas domestic usage if a laugh is not competitor for lirto in domestic usage

in short run

2. The product of monopolies could be distingued from other goods (no close substitutes)

It is fit .laughs is not close substitute –since it is not in higher the market share

3. Barrier to new competition-

it is fit .sri lanka is emerging market

4. Firms’ demand curve is market demand curve.it is downward sloping normal demand

curve

5. Monopolies are able to influence the market price by varying his output.

6. In the short run monopolists enjoys with abnormal profits or losses. But in the long run

they gain abnormal profits only

Demand & revenue

Since there is a single firm in the industry, the firm’s demand curve is the industry demand

curve. This is assumed known and has downward slope



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Short-run equilibrium:-

Graph A1

Equilibrium point= B(MR=MC)

Total cost –OLMQ

TR-OPNG

Super normal profit=LPNM

Long –run equilibrium:-

In the long run the monopolist has the time to expand his plant or to use

Exercising plant at any level which will maximize his profit. With entry blocked, however it is

not necessary for the monopolist to reach an optimal scale .monopolist will most probably

continue to earn super normal profits even in the long-run, given that entry is barred

Graph A2



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• The size of the plant and the degree of utilization of any given plant size entirely depend

on the market demand

In a pure competition the firm is a prices taker. The output or the firm is sold at the prices

determined by the market. The monopolist is faced by two decisions: setting his prices and

his output .however given the downward sloping demand curve the decision are

interdependent. The monopolist will both set his prices and sell the amount that the market

will take at it or he will produce the output defined by the intersection of MC and MR which

will be sold at the corresponding price P. the monopolist cannot decide independently both

the quantity and the prices at which he wants to sell it

Price determination:-

Prices discrimination exists when the same product is sold at different prices to different

prices to different buyers. The cost of production is either the same or it differs but not as

much as the different in the charged prices.

The product is basically same, but it may have slight difference (for example, difference in

litro, laughs)

The necessary condition, which much be fulfilled for the implementation of prices

discrimination are the following

1. The market must be divided into sub markets with different elasticity’s.

2. There must be effective separation of the sub markets so that no re selling can take

place from a low prices market to high prices market\.



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Government tax revenue

Tax incidence is the analysis of effect of particular tax on distribution of economy welfare. Tax

incident is said to fall upon that group that at the end of the day who bears the burden of the tax.

The key concept is that tax incident tax burden does not depend where the revenue is collected

but on the price elasticity of demand and prices of supply

Tax revenue

Indirect

tax

On International trade import duties

port & airport etc.etcetcetcetcdevelopment

On domestic goods & services

Vat exercise etc

Duties

bnt

Direct tax

Pst

sTax

a

b

c

pe

P1

pa

Q1 Q00 q



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Elastic=it depends on percentage

Inelastic=it depends supply or demand not percentage straightly tax

Supplier bears the tax

Customer bears the tax imposition

D

S2

P

Q

S1

S2

P

Q

S

Tax

Tax



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DEMAND THEORY

Demand refers to the effective demand, the demand for good at one price is usually different

from demand at another price, and hence demand means the amount of a thing that consumers

are willing to pay at a specified price and a specified time

Demand schedule

An individual demand for a good tends to vary with its price the lower the price the higher will

be demand for it .on this basis we can construct the individual ‘s demand scheduling showing

that the quantity demanded will be lower at prices and higher at lower prices. The schedule

would represent the individual’s present behavior with regard to the purchases of the goods at

varying prices.

Individual demand schedules of all buyers of that good can be aggregated to obtain a market

demand schedule representing total demand for the good in the market (table 1)

Table1-market demand schedule example

Prices

per unit

Quantity

demanded per

month (unit)

5 1000

4 2000

3 3000

2 4000

1 1000



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The information contained in the demand schedule i.e. The amount bought at each prices, can be

represented on a graph as the demand curve in fig.1.prices is measured on the y axis and the

quantity demanded on the x axis.DD is the demand curve representing the state of demand for

the good at a particular prices and a particular time .it is a curve showing how much of the good

consumers.

Demand curve generally slopes down from left to right because:

As prices of a good falls, some of the present buyers might buy more of it due to the fall in rice.

Also people who were unable to buy the good earlier due to the higher prices will now enter the

market and so the quantity demanded will rise. When the price of good falls .consumer’s real

income increase and he is able to buy more units of that good whose price has fallen. This is

called the income effect of a price change.

A. Some people will buy the good as its price has fallen in preference to goods which. They

bought earlier but which are now relatively more expensive this termed a substitutioneffect of a price change.

We thus derive the first law of supply and demand .lower the price greater the quantity

demanded, higher the price, smaller the quantity demanded.

Actual Demand Curve Is Not Straight Line As Seen

On Picture above Depending Variables X =Q, Y=P

Actual Demand Curve is mostly looking like this

picture above Depending Variables X =Q, Y=P



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Theoretical background

*A product itself has an economical demand and supply determinants in micro economics

The product litro gas itself has the same demand determinants in sri Lankan economical market

And the determinants as follows:

Price of the product - Px

Price of other product – Pn-1

1. Price of the substitute product-px-py(x litro,y laughs gas, kerosene, bio gas,)

2. Price of complementary product (regulators, cylinder, hose)

Consumers’ income (i)

1. Normal goods –essentials (the product falls into this category)

o Essential goods (whose demand changes relatively @ low rate than the

rate @ which consumers income changes

Future price expectation of consumers (E)

No of buyers (N)

Demographic factors (limiting other factors related)

Population (size, distribution)

Income level

*Demand Equation:

Demand QDX= f (Pi, Pn-1, I, E, N, D)

Concept built based on:-assuming that all the determinants remain constant except price

Taking into consideration the determinant of quantity demanded of x “litor gas” as price with

other determinants being constant.



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The amount of the product that consumers are willing to and able to purchase, decreases when

price is getting higher, increases when price is getting lower with supportive theory “Domestic

consumers consume only one product at a time as marginal utility theory says

It is making “the law of demand” theory when this assumption is applied into graph axis with x

and y (changed into x=price, y=quantity demanded for showing negative relativity between

them)

Even individual domestic consumer of litro gas is individual demands of a srilanka economy

supply- demand market making finally overall market demand at a given period of time given

place

Lirtogas has individual demand and market demand

Individual that consists of quantity demanded of one person for each price for given period of

time

Market that consist of quantity demanded of whole person for each price for given period of

time



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Individual individual market

+ =

Table 1 standard demand equation

qd=a-bp

B=quantity demanded change/price change

A=quantity when price is “0”(cut off point where demand curve is cut off at price axis)

Qd=quantity demanded

P=price

Q Q Q

P1

P2

Q1 Q2 Q1 Q2Q1 Q2



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Matrix for essential goods

PurchasingPower +

Spending OnEconomy +

Gdp+ Consumption+

Data Collection and construction Of The Demand Curve

Essential

GoodsPrices -

Inflation -

Satisfaction

OfCustomers+

Purchasing

Power+

Each

Consumer

From areas

Are you

consuming

litro gas for

domestic

usage?

Yes/no

How many

members

are in your

family?

How many

members

earn in your

family

Income of

chief of the

house

hold(15k to

25k,25k to

50k,above

50k)

2014-2015 for

3months

consumption

Are you

giving

preference to

litro gas

only?

Are you

happy with

tax

reduction on

litro?

Colombo yes 2 1 15k to 25k 1 yes yes










25

Colombo yes 3 1 25kto50k 1 yes yes




Colombo yes 4 1 25k to50k 2 yes yes





ragama yes 2 1 15kto25k 1 yes yes




ragamc yes 4 1 25kto50k 2 yes yes




ragama yes 5 2 25k to 50k 2 yes yes











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Of Gathered data shows .we can make assumption that people who are buying litro gas for

domestic usage has intention of buying product more when prices are lower ( justifying most

accepted theory essential goods having negative relation with prices)

Graphical explanation

(The demander demands the product with purchasing power at given time Dec 2014 –Feb 2015

at place litro agency at given price)

Fact figures (referring questioners)

Prices quantity demanded averaged income level

1896 1 20000/=

1496 2 20000/=







Total 40 ∑=40 ∑=153 ∑=53 ∑ =averaged

20812.5/=

∑=59 ∑=40 yes ∑=40 yes



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Price trend with tax trend over 3 months (14dec-15feb)

equilibrium point

Price(averaged

data’x’)

Consumed

Quantity

demanded(actual)

1662.667 59

where people total consumption are equal to supplier sales in that

areas

for period of 3 months

-500

0

500

1000

1500

2000

2500

Nov-14 Dec-14 Dec-14 Jan-15 Feb-15

prices befor tax

prices after tax data

x

domestictaxes

reduction

months

prices

before

tax

domestic

taxes

reduction

prices

after tax

data” x”Dec-14 2146 -250 1896

Jan-15 1896 -300 1596

Feb-15 1596 -100 1496

mean of

x=average 1879.333 -216.6667 1662.667

25%

75%

DATA PERCENTAGE

1

2

Out of 40

people-100%

30 colombo-

75%

10 ragama-

25%



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INDIVIDUAL

DEMAND

CURVE PER

PERSON INDIVIUAL

MARKET

DEMAND 40

CONSUMERS

40 CONSUERMS

ACTUAL

CONSUMPTION @

EQULLIBRIUM POINT

AS A WHOLE MARKET

DEMAND

AVEARGED

PRICES Q

EQULLIBRUIM

POINT

PRICES QD QD

2296 0 0

1896 1 40 59 1666.67

1496 2 80

0 5.74 229.6

0100200300400500600700800900

10001100120013001400

15001600170018001900200021002200230024002500260027002800290030003100

0 1 2 3 4 5

P

R I C E

QUANTITY DEMANDED

INDIVIDUAL DEMAND CURVE

INDIVIDUAL DEMAND CURVE PER

PERSON

Linear (INDIVIDUAL DEMAND

CURVE PER PERSON)



29

0100200300400500600700800900

100011001200130014001500160017001800

1900200021002200230024002500260027002800290030003100320033003400350036003700380039004000

0 40 80 229.6

T i t l e

Title

MARKET DEMAND CURVE

MARKET DEMAND 40

CONSUMERS

Linear (MARKET DEMAND

40 CONSUMERS)



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Prices Elasticity lirto and its effect on tax as per data

ED=%changes in quantity demanded / % changes in prices

ED=100% / 21.09 (1/1*100=100% and 400/1896*100=21.09)

ED=4.7 elastic demand

It is shown that lirto is elastic demand since it is essential so that government has imposed tax

considerably low taking into consideration elasticity and the consumers basic needs of ordinary

but at sometimes government imposes tax higher to get revenue on this litro gas .reason behind it

is consumers give preference to this litro gas with no choice to alternative In sri lanka both

happens from time to time due to economic policy.

individual demand curve’s equation calculated Based On Data Collected

Qd=a-bp b=1/400=0.0025

1=a-0.00258×1896

a=5.74

qd=5.74-0.0025p

MARKET DEMAND CURVE’S EQUATION CALCULATED

Qd=a-bp

b=40/400=0.1

40=a-0.1×1896a=229.6

qd=229.6-0.1p

formula being applied to 59 quantity demanded at market demand

qd=229.6-0.1p59=229.6-0.1p

170.6=0.1p

P=1706 as per formula approximately near to mean price 1666.667 it is assumed 40 people buy

litrogas at the equilibrium price that is averaged



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Conclusion

Litro gas 12.5kg as imported goods in srilanka is consumed by house hold users

The price of litro gas varied by government tax

The tax effect puts some burden on consumers who buys the product

Demand nature of litro is elastic curve demand mostly horizontally sloping curve that is more

sensitive to more variance.

Sample gives clues of demand will not get changed when prices get increased because of people

who brought earlier will be now shifted to the product

Government keeps it as a monopoly structure to be controller of the price so that people are

giving preference to lirto gas.it is easy to get revenue for government

Liro gas essential product that is more sensitive to price after tax relief where an

individual quantity demanded increases in assumption but in reality the people who don’t

buy product will engage newly in buying lirto gas .this incident will lead to action lirto

gas demand will increase as a whole

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