British Petroleum

Group Presentation #6: Curt Kiebler, Joe Bond, Brittney Trich

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 Government’s Role

Profit

History:• BP started back in 1901 when William

D’Archy obtained a concession from the Shah of Persia to explore for oil resources of the country.

• D’Archy’s 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.www.bp.com

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.

• 1940’s 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

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

• 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.

TAXESSpecific 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 BP’s market supply curve upward by the amount of the tax.

$1.37

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• New higher supply curve tells us BP’s gross price – what they actually get before they pay the tax

• Gross price is $1.81• New supply curve also tells us BP’s net price – the

amount BP gets to keep Gross price -Tax=Net price $1.81-$0.44=$1.37

$1.37

$1.81

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Substitution Effect

BP vs Crossroads

BP’s price per gallon Crossroads price per gallon

$1.37 $1.37

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

COSTSFixed costs - costs of fixed inputs

includes: plants, machinery, land, buildings

Variable costs – costs of variable inputsincludes: labor/hourly wages

Fixed Costs + Variable Costs = Total Costs

Total Revenue and Total CostFor 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

TRTC

P

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www.morningstar.com

Two Definitions of Profit

Accounting Profit

Total Revenue - Accounting Costs

(only Explicit)

Economic Profit

Total Revenue – All Costs of Production

(Explicit and Implicit)

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 it’s output as given.

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

Price Discrimination

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

Requirements for Price discrimination:

1. There must be a downward-sloping demand curve for the firm’s output.

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

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

Government’s RoleGovernment 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

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

Questions?