1. British Petroleum Group Presentation #6: Curt Kiebler, Joe Bond, Brittney Trich

2. Table of Table of Contents Joe Bond: History of BP What is Economics? Opportunity Cost Substitutions and Complements Brittney Trich: Curt Kiebler: Taxes Perfect Competition Substitution Effect Price Discrimination Cost Governments Role Profit

3.

• BP started back in 1901 when William DArchy obtained a concession from the Shah of Persia to explore for oil resources of the country.

• DArchys resources were diminished

• 1905 Burmah Oil Company.

• 1908 they struck oil in Southwest Persia for the first time.

• 1909 the Anglo-Persian Oil Company.

• Charles Greenway seeked out more revenue and capital.

• British Governement.

History: www.bp.com

4.

• History Cont

• Greenway got his money and an outlet for his oil, and the British got fuel for their navy.

• Exploration extended from the Middle East, Europe, Africa, South America and Canada.

• 1935 the Anglo-Iranian Oil Company was formed.

• The postwar reconstruction of Europe, the high demand for oil enabled them to expand greatly.

• 1940s sales profits rose to record levels.

• There were arguments and conflicts among the Iranian government and the Anglo-Iranian Oil Company.

• 1954 British Petroleum Company was formed.

www.bp.com

5. What is economics???

6.

• That social science that deals with the way society chooses to allocate scarce resources in order to satisfy present and future wants and desires

Economics Is

7.

• The value of the best alternative given up in order to get something.

• Example:

• BP loses revenue for BP express if they choose to have more gasoline on hand and pay for more gasoline, rather than having more food, drinks, and various other products to sell in BP Express.

Opportunity Cost

8. Substitutes and Complements

9. TAXES

• Specific Tax- set dollar amount per unit

• BP charges a current gas price of $1.37 per gallon

• In PA, the tax on gasoline is $0.44 per gallon which

shifts BPs market supply curve upward by the amount of the tax. $1.37 1 s s

10.

• New higher supply curve tells us BPs gross price what they actually get before they pay the tax

• Gross price is $1.81

• New supply curve also tells us BPs net price the amount BP gets to keep

• Gross price -Tax=Net price $1.81-$0.44=$1.37

$1.37 $1.81 1

11. Substitution Effect

• BP vs Crossroads

• BPs price per gallon Crossroads price per gallon

• $1.37 $1.37

12. If BP lowers its price to $1.36 The quantity demanded for BP will increase The quantity demanded for Crossroads will decrease P Q P Q

13. COSTS

• Fixed costs - costs of fixed inputs

• includes: plants, machinery, land, buildings

• Variable costs costs of variable inputs

• includes: labor/hourly wages

• Fixed Costs + Variable Costs = Total Costs

14. Total Revenue and Total Cost

• For the year 2002, BP earned a total revenue of $180,186,000

• For the year 2002, BP incurred a total cost of $158,267,000

• Total Revenue Total Costs = Profit

• $180,186,000 - $158,267,000 = $21,919,000

TR TC P Q www.morningstar.com

15. Two Definitions of Profit

• Accounting Profit

• Total Revenue - Accounting Costs

• (only Explicit)

• Economic Profit

• Total Revenue All Costs of Production

• (Explicit and Implicit)

16. Perfect Competition

• BP fits the characteristics of

• Perfect Competition:

• BP has a large number of buyers and sellers

• Sellers offer a standardized product

• Easy entry or exit from the market

• BP is a price taker

• BP treats the price of its output as given.

17. BP Firm is assumed to be profit maximizers in a perfectly competitive market:

• Because of homogeneous product and perfect knowledge assumptions

• BP takes the market price as given and reacts to it

• Their objective is to maximize profits

• And profits are simply the difference between Total Revenue and Total Costs

• Profit is maximized when MR=MC

18. Price Discrimination

• Price Discrimination- is charging prices to different customers for reasons other than differences in cost.

• Requirements for Price discrimination:

• There must be a downward-sloping demand curve for the firms output.

• The firm must be able to identify consumers willing to pay more.

• The firm must be able to prevent low-price customers from reselling to high price customers.

19. Governments Role

• Government sets regulations on keeping the air clean:

• EPA (The Environmental Protection Agency)- Has the power to direct businesses to take specific actions. They have detailed control over what substances a business can release into the atmosphere or into the water.

• EPA Reduce Toxins and Carbon Monoxide

• Public utilities commissions set the prices for gas.

• The Government also sets limits on Transportation & Storage

20. Government enforced taxes :

• Excise tax- which is a tax on specific goods or

• services

• State Tax- tax paid by business to the state

• Federal Tax- tax paid by business to the

• Federal Government

21. Questions?