Answer to Question #304449 in Economics of Enterprise for Lukas

Question

Internationalcrude oil prices have climbed up to an all-time high of $105 a barrel for the first time since 2014 after failure of diplomatic efforts between Russia and Ukraine failed resulting into military conflict. This has resulted into crude oil prices and the resulting pump prices for consumers going up globally. Analysts have predicted that the prices will rise much higher amid fears of major disruption to the global energy supply

chain. Russia is one of the world’s largest producers of oil and natural gas and disruptions in its output.

(a) Discuss briefly the difference between ‘spot price’ and ‘future price’

(b) Do you support GRZ’s Fuel Subsidy Removal policy? Why? Explain with one paragraph.

(c) Suppose that you are the owner and manager of a small business (Give it a name for your hypothetical business). Briefly explain how a hike in fuel prices would affect your business costs, sales, competitiveness, and profit. Use one paragraph.

Answer 1

[a] Spot price is the current cash of the commodity for the purposes of the immediate purchase and the delivery of the same commodity while the future price of the commodity is the price of the commodity that is supposed to be delivered sometimes in future rather than the present.

[b] Subsidy removal policy is not a good idea because its removal will have direct impact on the standards of the living of people in a negative way. Removal means that the production cost will be high translating to high cost of commodities and living.

[c] Am the owner and the manager of the public service vehicle called luxury travel company limited. The hike in the prices of the oil will significantly translates to the increase in the fare prices in the proportion of which the prices rose. When prices rises up, there will be tendency of the customers [passengers] reducing because of the high cost of travelling. The competitiveness of the luxury travel company limited will be lowered and subsequently drop in the profit margins.