Motor Vehicle Manufacturing in Australia - Example

Name Lecturer Economics 6th April 2014 Motor Vehicle Manufacturing in Australia 1. Definition of the Motor vehicle manufacturing industry in Australia The Motor vehicle manufacturing industry refers to all the companies and activities involved in the processes of manufacturing motor vehicles, including various automotive components such as engines, gear boxes and bodies, but excluding tires, fuel and batteries. In Australia, the industry involves designing the products from scratch and manufacturing in significant volumes as well as manufacture of parts required in the production and aftermarkets. Also included are providers of service and specialized skills supporting the industry e.g. research services (Petty et al 9). As of this year, Australian local producers in this industry included Holden, a subsidiary of General motors, Ford Australia and Toyota Australia which manufactures a number of variants of Toyota’s international models. The Mitsubishi Motors Australia plant, previously Chrysler, closed down in 2008 as a result of sustained downturn in Australian markets. 2. Key products in the industry The Australian automotive industry is well known for the design and manufacture of ‘big’ sized passenger vehicles. The principal products in this industry are passenger automobiles and light trucks such as vans, pickups and sports utility vehicles as well as motorcycles. Commercial vehicles, that is, large transport trucks and delivery trucks though very important to the automotive industry, are secondary (Petty et al 13). 3. Inputs of the production process Factors of production Land- This refers to the physical location on which production is carried out, but also includes all natural resources used in the production of goods and/or services. Such natural resources are things like oil, water, earth minerals and coal. Labour- This refers to the effort that the workers contribute to the processes of producing goods and services. Capital- This refers to the buildings, machinery and tools used by the workers in the production of goods and services, but will include finances raised for operations. Capital will differ depending on the worker and the type of work done (Khanna 37). Entrepreneurship- This refers to the art of combining the various factors of production -land, capital and labour - to produce a product or service and earn a profit from the same. Examples of land factors in motor vehicle manufacturing include: land space, metals, water and oil. Examples of capital factors: machines, various tools, warehouses, workshops, industrial robots, electricity, computer systems and working capital (Levine 23). The vehicle manufacturing industry is very labour intensive. Skilled labour is mostly used while unskilled labour is no longer used except in a few cases such as moving parts from location to location. Examples of skills required include: engineering design, specialized painting, electrical and electronic skills, knowledge in mechanical assembly, machine operation, software development and programming skills, knowledge in hydraulic systems, computer integration skills and management skills. Most of the workers are full time while part time employees are minimal and only come in for specialized operations. The nature of the entrepreneurship resource in the motor vehicle manufacturing industry is such that the entrepreneurship occurred a long time ago and the factories are run by managers. Most of the factories are subsidiaries of global companies such as Toyota and Ford. Additionally, many parts producers and suppliers have liaised with the assembly plants as the assemblers seek to cut costs by outsourcing production of common parts such as bumpers, shafts, bolts, dashboards and steering wheels (Levine 29). 4. Demanders in the industry The motor vehicle assembling plants sell finished products to end consumers, that is, fully assembled, functional motor vehicles. On the other hand, the parts manufacturers sell parts and semi-assemblies to the assembly plants as well as to auto repair shops and motor vehicle affiliated institutions such as racing companies. However, the main buyers in the industry are the general populace who need completely assembled motor vehicle units (Petty et al 16). 5. Non price factors influencing demand In economics, the law of demand points out that, if other things remain the same, then the demand for a given commodity will vary inversely with price per unit time. These other things independently affect the demand for a commodity and are thus the non-price factors. They include: change in population, changes in income, improvement in technology, changing tastes, change in wealth distribution, changed pricing of substitutes, changes in states of trade and climate changes (Adil 24). In the vehicle manufacturing industry, an increase in population or increased incomes will result in increased demand for motor vehicles. On the other hand, if a competitor reduces the price of a substitute unit, the demand will fall. The key non-price factors in this industry are changes in population, income changes, improvement in technology and pricing of substitutes. 6. Influence of income changes on demand D2 shows the original demand curve prior the influence of income change. D1 shows an inward shift while D3 shows an outward shift. The arrows show the direction of increase in price and demand. An increase in income will shift the demand curve outwards while a decrease will shift the demand curve inwards. An inward shift means that less quantity will be demanded for the same price as before. An outward shift signifies that more commodities will be demanded for the same price as before (Adil 18). 7. Differences between movement along and a shift of the demand curve. Movement along a demand curve happens when the only factor that’s changing is price. Since only price changes along the y axis, there is no need for the translation of the curve. If one wants to find the demand level for a new price, a line is drawn along the price and where it intersects the demand curve is the level of demand corresponding to that price, as shown in the figure. For instance, price P1 corresponds to quantity Q1. The arrow along the demand curve D1 shows movement in case of increase (expansion) or decrease (contraction) in price. In this case, it shows movement as demand decreases. On the other hand, a shift of the demand curve refers to movement of the curve as a result of various determinants of demand, other than price. In figure 2 above, a shift from the demand curve D1 to D2 is an inward shift or a shrink in demand, orchestrated by actual translation across the plane (Khanna 78). 8. Non-price factors influencing supply In addition to price as the main factor affecting supply, the cost of production (land, capital, enterprise costs and labour costs) is also a key factor. Other non-price factors include: the current state of technology, government policies and regulations, taxes, subsidies, business objectives, competition and market size/outlook. An example in the car manufacturing industry is a situation where a competitor under-prices a substitute car or part. This will influence the supply of other companies. Additionally, in a recession, the market size reduces, hence affecting supply adversely (Khanna 58). Lowered taxes and granting of subsidies will improve supply and advancement in technology will influence supply in a positive way. The key non-price factors in the motor-vehicle manufacturing industry are cost of production, government policies, market outlook and level of technology. 9. Influence of production costs on supply In the figure shown below, when production costs increase, the industry faces increasing costs at each quantity level. If other factors are held constant, the supply curve will shift inwards i.e. S1 from S2, to reflect the increased cost of production and the supplier will supply less at each level of quantity. A decline in production costs will result in a shift from S1 to S2. A supplier will sell a larger quantity at each level of price. D is the demand curve corresponding to supply for the given conditions. P1 is the price corresponding to quantity Q1 on supply curve S1 while P2 corresponds to quantity Q2 on curve S2. 10. Differences between movement along and a shift of the supply curve in the industry Movement along a supply curve results from change in price of a good/service. In the law of supply, as prices increase, the quantities supplied increase and when prices fall, a contraction of the supply follows. Figure 1 above shows the quantity changes corresponding to changing prices on the supply curve S. On the other hand, shift in a supply curve refers to the changes in supply. In the laws of supply, it is pointed out that considering other factors remain the same, the amount of product/service offered for sale will increase with increase in price and decreases with decrease in price. However, a change in a non-price factor such as production costs will cause a supply curve to shift. In figure 2 above, a decrease in production costs of a certain model of motor vehicle results in an increase in production and hence the supply curve S1 shifts to S2. An increase in production costs of the same will cause reduced production which means reduced quantity, hence a shift from S1 to S3. An increase in production costs causes potential profits to plummet and this causes producers to find alternative goods to produce, hence reduced supply of that commodity (Adil 22). Works Cited Adil, R. J., Supply and Demand. Mankato: Capston, 2006. Print Hubbard, Garnett, Lewis and O’Brien, Microeconomics, 2nd edition, Boston: Pearson.2011.Print Khanna, O.P., and Jaine, T.R., Business Economics. NewDelhi: FK Publications, 2008. Print Levine, P. D., Economic Studies: Contributions to The Critique of Economic Theory. London: Routledge, 2011. Print Petty, R., and Enright M.J., Australia’s Competitiveness: From Lucky Country to Competitive Country. Sydney: John Wiley & Sons, 2013. Print. Read More