1

ASSIGNMENT-ECONOMICS OF BUSINESS ENTERPRISE

(ADBM MODULE ASSIGNMENT)
ADBM- ESA -146P

NATIONAL INSTITUTE OF BUSINESS MANAGEMENT

ADVANCED DIPLOMA IN BUSINESS MANAGEMENT (SATURDAY)

Table of content
1.

Introduction to the product

2.

Methodology

3.

Theoretical background

4.

Data collection and construction of the

demand equation
5.

Conclusion

ECONOMICS OF BUSINESS
ENTERPRISE
GROUP ASSIGNMENT

PRODUCT:
LITRO GAS LANKA

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

Group Members:
Name
W A D DILAN
G.PRADEEP
NAVEEN
MADUSHANKA

Class
ADBM-ESA-14.6P 11
ADBM-ESA-14.6P-56
ADBM-ESA-14.6P
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.

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.

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 lowpressure 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.

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.)

Area
selected

Infogarphic

foreign market

lirto ltd

points of sales
domestic
consumers
points
sales

of

domestic
consumers
domestic
consumers

litro
gas
limited

domestic
consumers
points
sales

of

domestic
consumers
domestic
consumers

points
sales

of

domestic
consumers

10

Methodology Aspects:
Targeting Selected Area
1. District Wise
Colombo
i.
ii.
iii.

Malabe
Wellawatta
Maharagama

Gampaha
i.

Ragama

Choosing consumers on above selected 4 areas

Sampling based on consumers income and consumption 10 families from each areas
I.
II.
III.
IV.

Malabe
Wellwatta
Maharagma
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

11

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 dont
have 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

2 districts

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

12

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 high
market 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.

13

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 competitionit 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 firms demand curve is the industry demand
curve. This is assumed known and has downward slope

14

QD

TR

MR

AR

10

20

200

10

40

320

60

360

-2

80

320

-6

100

200

ED=1

AR/D

In a monopolist firm MR is than AR/D

Equilibrium of monopolist:The monopolist maximizes his short run profits if the following conditions are fulfilled.
1. MC=MR
2. The slope of the mc is greater than the slope of MR at the point of intersection.

15

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

16

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 elasticitys.
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\.

17

Government tax revenue

Tax revenue

Indirect

Direct tax

tax

On International trade import duties

On domestic goods & services

port & airport etc.

etcetcetcetcdevelopment

Duties

Vat exercise etc

bnt

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

st

Tax

pe
P1
pa

c
0

Q1

b
Q0

18

Elastic=it depends on percentage

Inelastic=it depends supply or demand not percentage straightly tax
P
S1

S2

Q
Tax

Supplier bears the tax

P
S2
S1
Tax
S

Customer bears the tax imposition

19

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 individuals 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

Quantity

per unit

demanded
month (unit)

1000

2000

3000

4000

1000

per

20

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

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 .consumers 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 substitution
effect 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.

21

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.

22

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

23

Individual

individual

P1

market

P2
Q1

Q2

Q1

Q2

Q1

Q2

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

24

Matrix for essential goods

Essential
Goods
Prices -

Inflation -

Satisfaction
Of
Customers+

Purchasing
Power+

Purchasing
Power +

Spending On
Economy +

Gdp+

Consumption+

Data Collection and construction Of The Demand Curve

Each

Are

How many

How many

Income

2014-2015 for

Are

Consumer

consuming

members

members

chief of the

3months

giving

litro gas for

are in your

earn in your

house

consumption

preference to

tax

domestic

family?

family

hold(15k

to

litro

reduction on

25k,25k

to

only?

litro?

From areas

you

usage?

of

you

Are

gas

50k,above
Yes/no

you

happy with

50k)

Colombo

yes

15k to 25k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

25k to 15k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

15k to 25k

yes

yes

Colombo

yes

15k to 25k

yes

yes

Colombo

yes

25k to 50k

yes

yes

25
Colombo

yes

25kto50k

yes

yes

Colombo

yes

15k to 25k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

25k to50k

yes

yes

Colombo

yes

15kto25k

yes

yes

Colombo

yes

25kto50k

yes

yes

Colombo

yes

25kto50k

yes

yes

Colombo

yes

15kto25k

yes

yes

ragama

yes

15kto25k

yes

yes

Colombo

yes

25kto50k

yes

yes

ragama

yes

25kto50k

yes

yes

Colombo

yes

25kto50k

yes

yes

ragamc

yes

25kto50k

yes

yes

Colombo

yes

25kto50k

yes

yes

ragama

yes

15kto25k

yes

yes

Colombo

yes

15k to 25k

yes

yes

ragama

yes

25k to 50k

yes

yes

Colombo

yes

25k to 50k

yes

yes

ragama

yes

25k to 15k

yes

yes

Colombo

yes

25k to 50k

yes

yes

ragama

yes

15k to 25k

yes

yes

Colombo

yes

15k to 25k

yes

yes

ragama

yes

15k to 25k

yes

yes

ragama

yes

25k to 50k

yes

yes

Colombo

yes

25k to 50k

yes

yes

26
Colombo

yes

25k to 15k

yes

yes

ragama

yes

25k to 50k

yes

yes

ragama

yes

15k to 25k

yes

yes

ragama

yes

15k to 25k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Colombo

yes

25k to 50k

yes

yes

Total 40

=40

=153

=53

=averaged

=59

=40 yes

=40 yes

20812.5/=

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

20000/=

1496

20000/=

27

prices
domestic
before
taxes
months
tax
reduction
Dec-14
2146
-250
Jan-15
1896
-300
Feb-15
1596
-100
mean of
x=average

1879.333

DATA PERCENTAGE

prices
after tax
data x
1896
1596
1496

25%

75%

-216.6667 1662.667

Out of 40
people-100%
30 colombo75%
10 ragama25%

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

2500
2000
prices befor tax

1500

prices after tax data

x

1000

domestictaxes
reduction

500
0
Nov-14
-500

Dec-14

Dec-14

Jan-15

equilibrium point
Consumed
Price(averaged Quantity
datax)
demanded(actual)

Feb-15

where people total consumption are equal to supplier sales in that

1662.667 59
areas
for period of 3 months

28

INDIVIDUAL
DEMAND
CURVE PER
PERSON
PRICES
2296
1896
1496
0

40 CONSUERMS
ACTUAL
AVEARGED
CONSUMPTION @
EQULLIBRIUM POINT PRICES Q
MARKET
DEMAND 40 AS A WHOLE MARKET EQULLIBRUIM
INDIVIUAL CONSUMERS DEMAND
POINT
QD
QD
0
0
1
40
59
1666.67
2
80
5.74
229.6

PRICE

INDIVIDUAL DEMAND CURVE

3100
3000
2900
2800
2700
2600
2500
2400
2300
2200
2100
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0

INDIVIDUAL DEMAND CURVE PER

PERSON
Linear (INDIVIDUAL DEMAND
CURVE PER PERSON)

QUANTITY DEMANDED

29

Title

MARKET DEMAND CURVE

4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700
2600
2500
2400
2300
2200
2100
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0

MARKET DEMAND 40
CONSUMERS

Linear (MARKET DEMAND

40 CONSUMERS)

40

80
Title

229.6

30

individual demand curves equation calculated Based On Data Collected

Qd=a-bp
b=1/400=0.0025
1=a-0.002581896
a=5.74
qd=5.74-0.0025p
MARKET DEMAND CURVES EQUATION CALCULATED
Qd=a-bp
b=40/400=0.1
40=a-0.11896
a=229.6
qd=229.6-0.1p
formula being applied to 59 quantity demanded at market demand
qd=229.6-0.1p
59=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

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.

31

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 dont
buy product will engage newly in buying lirto gas .this incident will lead to action lirto
gas demand will increase as a whole