Market Structure and Foreign Trade - Assignment Example

Qs a The three main types of resources are: land, labor, and capital (Manwich, 2008). For the car manufacturing industry, land would include the physical premises, owned or rented by the company, where the factory for the company is situated. Labor would be the skilled workforce that operates the automated machinery or is responsible for fitting the physical components of the car on it, such as doors, engines, etc. Capital would include the automated robots and machinery that are used to enhance the productivity of the workers. Qs. 1b Fixed costs are those costs that would be incurred even if no production takes place. For example, the electricity bills of the factories or the taxes paid on land are fixed costs because even if no production takes place in the factories, these costs would still be incurred. Variable costs, on the other hand, are those costs that are directly related to the number of units produced (Case & Fair, 2007). For example, depending on the number of cars produced, the variable costs would differ because for every additional car produced, the company would incur costs in components such as doors, engines, glasses, mirrors, seats, etc. Qs. 2a Qs2b As the demand of new cars increases, the demand curve shifts to the right (D1). This means that for the same price (P0), a higher quantity of cars (Q1) would be demanded. As a result, firms can observe higher profits by increasing the price, which in return causes the demand to decrease until the intersection of D1 and S0 is reached. At this point (E*), the market is in equilibrium. Therefore, the Scrappage Scheme caused to output to increase (Q0 to Q1), and price to increase as well (P0 to P*). Qs.2c As demand for new cars increased and demand for used cars decreased, firms would decrease prices of the used cars to increase sales. Therefore, overall, the price and output of used cars would decrease. Qs. 2d The two non-price determinants could be: 1. Oil prices going down. This would cause demand for cars to increase as consumers would now shift from cheaper means of transportation, such as public transport, to buying their own cars. 2. Lack of substitute goods. If alternate means of transportation, such as public transport, were to shut down, the demand for cars would increase. Qs.3 Opportunity cost is defined as the next best alternative that we forgo, when we make a decision or a choice. (Case & Fair, 2007) An obvious opportunity cost for funding the Scrappage Scheme is that the government could have used that money on other areas of the transport industry. For instance, if the government observed a decline in the number of cars purchased, due to recession and increasing fuel prices, it could have made investments to boost the public transport sector and could have promoted the usage of public transport and created more job opportunities there. Qs.4a There are many reasons why PED for cars is likely to be more elastic in large cities. Firstly, the larger cities, such as London, are economic hubs of UK and they have a good infrastructure present. These places offer a large of substitutes for cars to the consumers. There are many forms of public transports available, for example. The consumers can easily switch from cars to subways, buses, taxis, and so on. (wisegeek, n.d.) Moreover, in cities like London, the traffic situation is extremely poor. Consumers already experience many problems such as traffic jams, parking problems, and so on, and these problems are already making them substitute to alternative means of transportation. Increasing the prices of cars would only add up to their complaints and make the demand for cars even more elastic. Qs.4b i) Hybrid car manufacturers could promote the benefits of their cars and make their cars appear to have no substitutes available. When consumers compare the cost savings from hybrid cars to those of using public transport, they should not find much difference. In addition to that, the marketing of the hybrid cars should position the cars so as to compete against the petrol driven cars, and at the same time promote the advantages of better fuel economy. Qs.4b ii) The obvious benefit for the firm from lower price elasticity would be that the firm could increase the prices of the cars without affecting the demand by the same proportion, to maximize their total revenue. (Seager, 2006) Qs.4 c The income elasticity of demand, YED, explains how the real income of consumers affects the quantity demanded by them. When income increases, demand for inferior goods decreases and demand for normal and luxury goods increases because consumers now have more disposable income to spend. Therefore, with increasing real income, the demand for hybrid cars would increase. Qs. 4d The primary determinant of PES is time. This means that in the short run, the PES would be relatively inelastic as compared to the PES in the long run. This is because when prices of cars change, the manufacturer would take time adjusting their quantity produced. Qs.5 a The term ‘economies of scale’ means that increasing the scale of production, a firm would experience lower costs per unit produced. This is because when the quantity produced is increased, the fixed costs get divided amongst a greater number of units and therefore, decreases the per unit total cost of the product. (Amadeo, n.d.) Qs.5 b In car production, increasing the scale of production could result in economies of scale. For instance, when production is increased, bulk buying can be done from the suppliers on which the suppliers could give discounts. Therefore, the costs per unit would decrease as the manufacturer obtains the raw material such as leather, paint, tires, steel, etc. in bulk. Another way of obtaining increasing returns to scale could be that when production is increased, standardized production techniques could be used, through automated machinery, to increase the output efficiency and reduce costs per car. However, for lower units of production this investment could be too costly to implement effectively. Qs. 6 a The four questions that we must ask are: 1. What is the number and strength of buyers and sellers in the industry? 2. What is the level of competition between the firms in the industry? 3. To what extent are the products differentiated? 4. How easy it is to enter or exit the market? (Helpman & krugman, 1985) Qs. 6 b The car manufacturing industry is an oligopoly. The following answers to the above mentioned questions would explain why 1. The car industry comprises of a large number of buyers. However, only a handful of car manufacturers dominate the industry. For instance, GM and Toyota together produce about one-third of the entire production in the industry. Apart from these two, only a few other large companies dominate the industry and can influence prices. 2. The level of competition between the firms is high. 3. Companies try to differentiate their products as much as possible focusing on different aspects such as performance, luxury, practicality, and so on. Qs. 7a 1. The externalities involved in the production of new cars include the carbon dioxide emissions that are extremely hazardous for the society 2. Because of the oligopolistic market structure of the car industry, the hybrid cars charge premium price for the fuel efficiency they offer. Qs. 7b 1. The government could impose quotas on the carbon dioxide emissions in the factories producing cars. This would cause the car manufacturers to explore more environment friendly procedures in the production processes to produce a high number of cars. 2. Government could intervene in the free market by restricting the prices charged for the cars. (Frank, 2008) BIBLIOGRAPHY Case, K, Fair, R. (2007) Principles of Economics. Eighth Edition. Pearson Education Inc. Manwick, G.(2008). Principles of Economics. Fifth Edition. Cengage Learning. What is the price elasticity of demand (n.d.) wise geek. Available from http://www.wisegeek.com/what-is-price-elasticity-of-demand.htm [Accessed April 14, 2010] Seager, H.(2006). Principles of Economics. Elibron Classics Series. Adamant Media Corporation Good, A. & Kahn, R. (n.d.) Economies of Scale. Wiki Invest. Available from http://www.wikinvest.com/wiki/Economies_of_scale [Accessed April 14, 2010] Amadeo, K.(n.d.) Economy of Scale. About.com. Available from http://useconomy.about.com/od/glossary/g/economy_scale.htm [Accessed April 14, 2010] Helpman, E. & Krugman, P.(1985). Market Structure and Foreign Trade. Asco Trade Typesetting Limited Frank,R. & Bernanke, B. (2008). Principles of Economics. 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