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Inelastic product demand and its effects on profit maximization

Chapter 1

1. Problem and Its Background

1.1 Introduction

The demand, supply and competition in the market among the compressed natural gas (CNG) business organization to generate the maximum revenue. As the demand is increased as well as the supply is also increased with the increase of price. The rising price of compressed natural gas (CNG) is the major issue that the consumer does not find gasoline substitute. The sui northern gas pipelines supplier of the natural gas that to generate the revenue with gas development surcharges, as the development surcharges increase, the revenue of government is also increased. When the price of compressed natural gas increases the small effects on the demand of the compressed natural gas (CNG). The compressed natural gas (CNG) is a cheaper fuel as compared to the petroleum products that is available where the availability of the natural gas by sui northern gas pipelines ltd.(SNGPL)

The researcher describes that the price of the commodity such as gasoline the consumer is willing to pay at the current rate. The cost of production and supply of gasoline is increased by the sui northern gas pipelines (SNGPL) as to increase the sale rate of the compressed natural gas (CNG) and the consumer wants to buy the compressed natural gas at the current price, so the demand is greater than supply, if supply is greater than demand then the natural gas is available at low cost, the compressed natural gas (CNG) also to available to consumer at low cost at compressed natural gas (CNG) stations.

The high price of compressed natural gas (CNG) is a signal of potential profit for the organization but there is big competition in the market where the discount factor is affected on the sale of other compressed natural gas (CNG) business organization to sell with decided rate that to circulate from the compressed natural gas (CNG) association. The governmental policies also affects on the sale of the compressed natural gas (CNG) that to direct effects on the profit of the organizations.

As in these days, the gas load shedding by sui northern gas pipelines (SNGPL) and load shedding of electricity at compressed natural gas (CNG) stations and low inlet pressure for dispensing gas into vehicles are also major problems. The compressed natural gas (CNG) for the vehicles of the customers not to available due to the load shedding or low inlet pressure for filling at compressed natural gas (CNG) stations. The compressed natural gas (CNG) business organization also to suffer and to generate the low profit during the load shedding of gas or low inlet pressure supply from sui northern gas pipelines ltd. The demand is greater than supply as well as increase in price of compressed natural gas (CNG) with the generation of potential profit of the organization.

1.2 Definition of Construct

When a price change hasno effect on the supply and demand of a good or service, it is perfectly inelastic demand for maximizing the organizational profit.

(http://www.investopedia.com)

When the demand of the product does not increase or decrease with the increase or decrease of price.

(http://www.businessdictionary.com)

1.3 Background Information

Inelastic demand affects on the total revenue of the business organization, when the demand is greater than supply to generate the higher revenue for the business organization. Oil and gas regulatory authority to issue the license of marketing for selling the compressed natural gas (CNG) at stations, and also has the procedure for the inspection of the compressed natural gas (CNG) stations. The rising prices of compressed natural gas (CNG) due to the high cost production and supply of natural gas from sui northern gas pipelines ltd. (SNGPL). Compressed natural gas (CNG) has become the major sector of alternative fuel for the consumption into vehicles of the consumers. The compressed natural gas (CNG) business organizations are using the advance technology equipments for providing the quality of compressed natural gas (CNG) with the satisfaction of the customers. The management of the compressed natural gas (CNG) business organization to attract the customers with the quality of the natural gas by providing the standard pressure and services with satisfaction of the customers. There is a great competition in the market and discount factor also to affect the profit of the organization.

Autofuel CNG Groups is a partnership firm (group of companies), which was established in 1997, the business of the company to operate the compressed natural gas (CNG) stations under the different sites like Total Parco Pakistan Ltd., Pakistan State Oil Company, Shell Pakistan Ltd., Hascombe Storage Company Ltd. in different cities like kasur, faisalabad, Peshawar, Lahore, Gujranwala , okara. The operational compressed natural gas (CNG) Stations are nine and also to provide the technical services to other compressed natural gas (CNG) business organizations.

Researcher is basically a account officer at head office situated at Lahore. The inelastic demand to generate the higher profit of the organization. The demand is higher than the supply of natural gas, all Pakistan compressed natural gas (CNG) association to suggest the government not to increase the price of the natural gas as to supply from sui northern gas pipelines ltd. (SNGPL). If the price of the cost of the production and supply increase as the selling price of the compressed natural gas (CNG) also to increase. The management of the compressed natural gas (CNG) organization that to focus on the customers of compressed natural gas by providing the quality, quantity, and service with the satisfaction.

1.4 Research Question or Problem Statement or Objectives

(i) Research Questions

RQ1: To analyze either compressed natural gas (CNG) (alternative fuel) has inelastic demand behaviour?

RQ2: what are the profit maximization techniques if we are on inelastic demand?

(ii) Research Objectives

  1. To see that how to keep the loyalty of the customers and to maximize the profit of the organization.
  2. To see that the policies of the management and financial decisions are helpful in the economic growth.

1.5 Scope and Limitations of Study

Research will provide the information the inelastic demand of compressed natural gas (CNG) that to maximize the profit of the organization. Research will be conducted to Autofuel CNG Groups Lahore Pakistan from different positions and designations in account department, technical department and field staff of organization and also from customers.

There could be following limitation of the study that can be observed during interviews and questionnaires sessions.

  1. Data will be collected only from accounts, technical department so viewpoint of field staff and customers may not possible to collect.
  2. The employees of accounts department will be available but of the employees technical department will not available
  3. Researcher role in organization may subject to limitation.
  4. People some time fail to respond neutral due to personal limitation.
  5. Respondents are from technical department and spend most of their time in their work at compressed natural gas (CNG) sites and may not available.
  6. Personal moderation of printed questionnaire may be observed to complex.
  7. Researcher biasness is of most important nature
  8. State of mind of respondents is equally important
  9. Many respondents may be not educated so that site supervisor will be collected data from that employees.

(i) Significance of the Study

  1. The significance of study is that the inelastic demand of compressed natural gas (CNG) and how much raising in price the organization can maximize the profit.
  2. The natural gas is playing prominent role in the outlook of global energy.
  3. The leadership of organizations recognizes problems, is also commit the higher price of compressed natural gas (CNG) is affected on the income of the customers.

Chapter 2

2. Review of Related Literature

At least one paragraph in your own words.

There is no change in demand and supply with the increase or decrease in price of product that affects to maximize the profit of the organization. Inelastic demand is when the quantity demanded of a good does not change strongly to changes in price the percentage change in quantity demanded is less than the percentage change in price equilibrium price (Ep) is less than 1 (Ep < 1). (Holmes, Hannah. 2008). If the price of the commodity is increased so there is no affect on the demand of the commodity the quantity demanded increases with the increase of price of the as the demand is greater than the supply. The profit of the organization affects and to increase the organizational revenue with the increase of price of commodity. Inelastic demand means the quantity demanded is not responsive to change in the demand price, inelastic demand has coefficient of elasticity less than one (the negative value is ignored) (http://glossary.econguru.com). Ugra and Walters (2003) inelastic demand, there is no effect in demand and supply with the increase of decrease in price. Roy et al (2006) the rising price of commodity with the quantity demanded not to change with the price.

Yi (2000) highlighted that the rise in production cost and supply of natural gas to supply at higher price with the increase in quantity demanded. Khramov et al. (2008) the inelastic demand to maximize the profit of the organization with the increase of price of commodity. Ramirez, Juan C (2002) organizational profit raised with the increase in price with increase of demand and supply of commodity. Pindyck, (1999) the demand and supply behaviour that to determine the GDP growth for economic development. Dufour et al (2006) the price of the product that to increase with the increasing demand where the supply that to less than demand. Dees et al (2007) the informal approach that is used for identification of factor like economy and geopolitical that to affect the demand and supply and to watch the product price movement in market. Lynch (2002) the price of the product that is forecasted with the increasing demand trend of the product where the demand is greater than supply that to not affect on the demand behaviour. Khanna (2001) analyzed that if the supply of the product that to greater than demand and stability in market and product that to available in market at fair price.

Lee et al. (2006) the prices of the natural resources that to determine with the trend quantity demanded trend. Watkins (2006) the organization with its economic level that to focus on the quantity demanded of the product where the price is high. Gately and Huntington (2002) the price elasticity is depend on the price cut or increases in price in the imperfect price reversibility mechanism. Griffin and Schulman (2005) the consequences that to create price volatility that to affect and to intercept the demand Graham and Glaister (2002) gasoline and diesel oil are the dominant fuel for the transport sector where the demand is greater than supply. Barsky and Kilian (2004) the income and price elasticity has grown indecently where the demand of the product is not affected with the rising in price. Cavallo (2002) to suggest in his studies with high estimates peak future of quantity demanded in future. Kogan et al. (2003) the impact of the price due to the irrational trader that to not survive at long run.

The natural gas demand is highly own prices for domestic, commercial and industrial. Sui northern gas pipelines ltd. (SNGPL) is the supplier of the natural gas that to supply to the compressed natural gas (CNG) stations. Compressed natural gas is a alternative fuel consumption that to use into the vehicles of the customers. Compressed natural gas is available at compressed natural gas (CNG) stations at low price as compared to the petroleum products. The governmental policies also to affect the compressed natural gas (CNG) business by load shedding and by increasing the price of the compressed natural gas (CNG) to affect customers of low income that to use the compressed natural gas (CNG) as a alternative fuel for vehicles.

The products like necessity of life to increase in quantity demanded with the increase in price and income increase at maximum level is a income inelasticity and demand is greater than supply. (http://www.ecoteacher.asn).

(Henning, Sloan, de Leon 2003) the relationship between the level of production of natural gas and its price of supply also has the impact on the magnitude of the price that the low cost of production of natural gas to reduce the rate of supply and the price of the compressed natural gas (CNG) also to available at compressed natural gas (CNG) stations at low price if the cost of production and supply is higher then the price of the compressed natural gas (CNG) also to available at high price and its effects on the profit of the organization.

Vogelsang (2001) the demand of the product that to effect profit of the organization with the increase or decrease of the price of the product, the inelastic quantity demanded to maximize the profit of the organization.

Chapter 3

3. Methods and Procedures

3.1 Methodology of Study

For past perspective (i.e., to summarize previous research) Quantitative (Meta-analysis) and Qualitative (Content Analysis), and for current perspective Quantitative (Survey based), Qualitative (Interviews), the inelastic demand of product and its effect to maximize the profit of the organization of Autofuel CNG Groups Lahore.

Quantitative research and content analysis of research about the inelastic demand of compressed natural gas (CNG) to maximize the profit of the organization.

Quantitative findings the inelastic demand of the product that to increase the profitability of the organization will be summarised by using the research technique for analysis.

We will not be using any Meta or content analysis.

3.2 Current Quantitative Research

(i) Survey Instrument

Copy of the survey instrument is attached (see appendix).

(ii) Sample

The survey-based research may cover managerial, Supervisors, Operators and other employees and customers of Autofuel CNG Groups Lahore. Respondent of my study will be about 120 Respondents.

(iii) Data Collection

Data may be collected attwo levels (yes, no,) from the sample.

Focus group discussions may be conducted to explore people's (mini-sample from the original sample or otherwise) views about inelastic demand and its effects on profit for maximization the organization.

Chapter 4

4. Data Analysis and Representation

4.1Data Analysis

The data that will be collected from the questionnaire will be analyzed in MS Office by Microsoft Excel.

Chapter 5

5. Findings, Conclusions and Recommendations

Details of findings recommendations and conclusions will be explained.

References

1. Barsky, R.B. and Kilian, L. 2004. Oil and the Macroeconomy since the 1970s. Journal of Economic Perspectives, 18(4), pp. 115-134.

2. Cavallo, A.J. 2002. Predicting the peak in world oil production. Natural Resources Research, 11, pp. 187-195.

3. Dees, S., Karadeloglou, P., Kaufmann, R.K. and Sanchez, M. 2007. Modelling the world oil market: Assessment of a quarterly econometric model. Energy Policy, 35(1), pp. 178-191

4. Dufour, J.M., Bernard, J.T., Khalaf, L. and Kichian, M. 2006. Structural change and the dynamics of energy prices: Identification-robust test for time-varying parameters. Université de Montréal CIRANO and CIREQ Discussion Paper.

5. Gately, D. and Huntington, H. 2002. The asymmetric effects of changes in price and income on energy and oil demand. The Energy Journal, 23(1), pp. 19-58

6. Graham, D. and Glaister, S. 2002. The demand for automobile fuel: A survey of elasticities. Journal of Transport Economics and Policy, 36, pp. 1-26.

7. Griffin, J.M. and Schulman, G.T. 2005. Price asymmetry in energy demand models: A proxy for energy-saving technical change. The Energy Journal, 26(2), pp. 1-21.

8. Henning, B., M. Sloan, and M. de Leon. 2003. Natural Gas and Energy Price Volatility Arlington, Virginia: Energy and Environmental Analysis, Inc.

9. Holmes, Hannah. "Elasticity." [ECON 1B03]. MDCL 1305. McMaster University. September 19, 2008

10. Http://glossary.econguru.com/economic-term/inelastic+demand Last Assess on March 06, 2010 at 9.00 pm)

11. Http://www.businessdictionary.com/definition/inelastic-demand.html Last Assess on March 03,2010 at 12:00 am)

12. Http://www.docstoc.com/docs/20916129/Natural-gas-consumption-by residential-consumers Last Assess on February 28,2010 at 12.00 am

13. Http://www.ecoteacher.asn.au/Demand/elastsli/e33.htm Last Assess on March 01, 2010 at 6.00 pm

14. Http://www.iea.org/work/2004/investment/ses3-NITZOVpaper.PDF Last Assess on March 06,2010 at 01:00 pm

15. Http://www.investopedia.com/terms/e/inelastic.asp Last Assess on March 03,2010 at 12:00 am)

16. Http://www.lbl.gov/ScienceArticles/Archive/sabl/2005/February/assets/Natural-Vogelsang, I. 2001. “Price Regulation for Independent Transmission Companies,” Journal of Regulatory Economics, 20(2): 141-165, September

17. Khanna, N. 2001. On the economics of non-renewable resources. Binghamton University Department of Economics, Working Paper No. 0102.

18. Kiani, Khaleeq (2007) Kiani, Khaleeq (2007) Crisis as Oil Stocks Hit Rock Bottom. DAWN, December 11,2007

19. Kogan, L., Ross, S.A, Wang, J. and. Westerfield, M.M. 2003. The price impact and survival of irrational traders. MIT Sloan Working Paper No. 4293-03.

20. Lee, J., List, J.A. and Strazicich, M.C. 2006. Non-renewable resource prices: Deterministic or stochastic trends? Journal of Environmental Economics and Management, 51(3), pp. 354-370.

21. Lynch, M.C. 2002. Forecasting oil supply: Theory and practice. The Quarterly Review of Economics and Finance, 42, pp. 373-389.

22. Natural Gas Price Elasticities: Variations by Region and by Sector in the USA,‖ Khramov

23. Pindyck, R. 1999. The long-run evolution of energy prices. The Energy Journal, 20(2), pp. 1-27.

24. Ramirez, Juan C. and Juan Rosellon (2002), ―Pricing Natural Gas Distribution in Mexico,‖ Energy Economics, 24(3), May: 231-248.

25. Ramirez, Juan C. and Juan Rosellon (2002), ―Pricing Natural Gas Distribution in Mexico,‖ Energy Economics, 24(3), May: 231-248.

26. Watkins, G.C. 2006. Oil scarcity: What have the past three decades revealed? Energy Policy, 34, pp. 508-514.

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