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Impact of technology on productivity and average total cost

Gasoline as product:
1) Identify and discuss issues that affect cost on gasoline.
2) Discuss the impact of technology on productivity and average total cost.
3) Describe three to five factors in the economy that will impact the demand for gasoline and one for the cost associated with producing the good or service.
4) Identify the economic indicators that reflect those factors.
5) Locate a forecast for each of the economic indicators you have selected for the next two years. In some cases, it may be more feasible to look at prior trends for selected indicators rather than forecasts.
6) Comment on the degree of confidence that can be placed in economic forecasts.
7) Discuss the implications of this economic forecast and the income elasticity of demand for the pricing strategy.

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1) Identify and discuss issues that affect cost on gasoline.
Major components of Gasoline costs are:
1) Crude oil
2) Refining cost
3) Taxes
4) Distribution and Marketing costs
5) Profit
(eio,2008)
Crude oil forms the major component of the cost of Gasoline. The cost is between 48% to 58% of the Retail price of Gasoline as per the website http://www.eia.doe.gov
The issues are discussed in the later part in Q2 and Q3 of the answer.

2) Discuss the impact of technology on productivity and average total cost.
Better technology will lead to improvement in productivity. Positive changes in average and marginal productivity will reduce the cost of production. This is because of improvement in the marginal productivity and average productivity leads to economies of scale which helps in the cost reduction. On the other hand the "law" of diminishing marginal returns says that after a possible initial increase in marginal returns, the Marginal product of an input will fall as the total amount of the input rises (holding all other inputs constant). Thus diminishing marginal returns imply increase in marginal cost. This is shown in the downward sloping part of MPL curve. This is often explained as due to congestion. For example, consider a wheat farm: as the farm employs more and more workers, the farm will start being congested and the additional output that additional employee brings eventually diminishes.
(Wikipedia)
Hence fall in productivity can increase the cost and erode the competitiveness and on the other hand improvement in productivity will lead to reduction in cost and hence better margins (For example Reliance gas refinery is having the higher margins: www.ril.com)

3) Describe three to five factors in the economy that will impact the demand for gasoline and one for the cost associated with producing the good or service.
Factors affecting the demand for Gasoline are:
1) Business cycle
For example in case of Boom (When GDP is rising higher) the demand of Gasoline will be higher.
2) Weather
Good Weather leads to more driving and hence higher demand for Gasoline. This is the reason that in US the summers have higher demand for Gasoline
3) Disposable Income
Rise in average disposable income will lead to favorable demand.
4) Price of Gasoline
Higher price will lead to less demand of Gasoline
Factors affecting the cost of Gasoline are:
1) Policies of OPEC and other Oil producing nations
Crude oil is the major component of the cost as discussed above. Hence any price rise in crude oil will have a direct impact on Gasoline.
2) Taxes
Any increase in taxes will lead to increase in costs and vice versa.

4) Identify the economic indicators that reflect those factors.
The economic indicators are: GDP, Inflation, Interest rate etc.

5) Locate a forecast for each of the economic indicators you have selected for the next two years. In some cases, it may be more feasible to look at prior trends for selected indicators ...

Solution Summary

This discusses the impact of technology on productivity and average total cost

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