The Car Industry in Europe - Essay Example

It stands to reason that there must be a reduction the in the price of American luxury automobiles to help increase the quantity demanded to meet the new market equilibrium or improvements must be made to reduce the costs of manufacturing vehicles so that company profits can remain the same with a lower unit volume sale. The same kind of situation has occurred in Europe, with an over-supply of vehicles.In Europe, the market appears to be flooded with automobiles now. The supply is high. In order to compete in this crowded market, companies will have to reduce their prices.

Demand simply does not match the supply, therefore prices must be lowered. The problem is simple. As the author writes:Europe has almost 300 car and engine plants, according to the European Automobile Manufacturers’ Association (known as ACEA). Their collective capacity is thought to be about 27 million vehicles a year. Sales of new cars last year were just under 16 million and are expected to fall to as low as 14.5 million this year, according to Ford. The capacity was established when demand was high, before the recession.

Because car manufacturing is so capital intensive it is harder than other industries to be flexible to economic downturns. Manufacturers are therefore more vulnerable. They will make cars based on information from a year earlier and scale up their factories to do so when it turns out demand is not as high as they thought it was because people are scaling back their spending on things like cars, they will produce an over-supply. They will then have to substantially lower their prices. In conclusion, as highlighted by the case of the global automobile industry there has been a significant impact on the supply of vehicles in Europe.

Supply and demand are present throughout our various economies and affect nearly everything that we do. The better we understand how markets work the better we can plan our own finances and know when and where to invest.