Market Analysis: Car industry
A market is a platform where the forces of demand and supply, essentially in the form of buyers and sellers interact. It is a switchboard that directs those with a commodity towards those who are in need of it. Since demand and supply exists for virtually all products, similarly a market for cars also exists. The car market globally is dominated by the Japanese after the decline in the American car makers after the World War II. This market today is dominated by names like Honda, Toyota, Chrysler (now bankrupt), GM (now bankrupt), Mercedes, BMW and Ford etc. In the recent years, the market for cars has undergone major demand and supply changes, causing the prices to fluctuate, but this fluctuation has been a stable one. Demand Forces
The demand for cars in the world, in general, was increasing until the world was hit was a recession. The recession has impacted demand negatively. Demand can be defined as the quantity of a commodity, in our case cars, demanded at a certain price over a given period of time. The demand for cars is price elastic, which means that a price and quantity demanded have an inverse relationship, and an increase in the price of cars will cause the demand to fall.
The world market for cars has also seen a downward trend on the demand graph due to the recent economic crisis in the world. All the sectors in the economies all over the world have seen a decline in demand. Since all the sectors within an economy are interrelated, therefore the demand of the car market will also have an impact on the demand situation in the different raw material markets. Currently it is the global recession which has an impact on the demand of cars. However, when the markets are functioning normally, there are several other factors which impact demand. First and foremost this demand is influenced by income per capita. Income per capita refers to the amount of national income received by individuals in the country. The higher the per capita income, there will be an increase in demand for cars. Another factor that manipulated the demand of the car market is the price of oil. In case there in an increase in the price of oil, the demand for petrol cars will decrease. Furthermore, the demand side dynamics of the car market is affected by advertising. Advertising promoting specific cars or auto loans will also affect demand positively. Supply Forces
The other player in the car market, besides the customer is the supplier. In case of an increase in the price of a car, the supply for that particular brand or model will increase. One factor that influences demand for cars is the level of taxes on luxury commodities in the economy. If a government imposes high taxes on cars, the demand will naturally decline as the supply will be restricted. Price
If a tax is imposed on cars, then the supply will be reduced from Q1 to Q2 thus driving the prices upwards. However, in case a subsidy is given or an existing tax is withdrawn, then it will have an opposite effect, thus increasing demand for cars. Also, the supply of raw materials such as iron, plastic and rubber influences the demand for cars. In case of a shortage of rubber for instance, will reduce the number of tires available in the market, thus reducing supply of cars. Price signals
A price signal is message sent to consumers and producers in the form of a price charged for a commodity; this is seen as indicating a signal for producers to increase supplies and/or consumers to reduce demand. In the market of cars, the consumer spends hours going through car dealers and retail shops to try and find the best value for his money. Some cars deals attract his attention, whereas others don’t. But the final decision that the consumer makes is the result of different factors working together. When a consumer picks out a car which he wants to own, this is a clear indication to the producers that the car, model, price, color, features and various other components; the consumer feels that this is the best he can get from
his limited budget. It also means that all the other cars were rejected by the consumer. When these individual decisions are combined and seen as one that truly determines the success and failure of the care market. A simple example will help us in understanding how price signals work in a market. Paul is a 32 year old, middle management employee. He has a fixed budget that he sets out to get a new car He scanning the car market until he finds a car which he truly likes, a 2008 Black Honda Accord. He is willing to buy this car which is priced at $ 75000.Paul thinks that all the others cars that he could get within this price range, are really not worth his money. A number of factors play into this, the design of the car, color, features, cost effectiveness, mileage, model, its cost of repair in maintenance, possible leasing options if Paul wanted to lease the car. Changes in prices lead us to another immensely relevant topic Elasticizes. Price elasticity of demand (PED) is the relationship of changes and price and changes and demand. Generally, for cars PED will be elastic, because the consumers can shift to other substitutes. However, when you narrow down the cars to specific models, features, even colors PED becomes less elastic. The Importance of Information
Many markets do not have informed sellers and/or buyers. Paul for example would not have knowledge of all the cars their prices, features, colors and so on and so forth. For the market to be an efficient one the quality and availability of information needs to be improved. Paul doesn’t have the resources nor the time to do a full a market research of what car he can get under $ 75000. However, in the case of network markets large number of buyers and sellers are brought together with reliable information, in our case, information about the cars. With a better knowledge base of the consumers and producers, market efficiency increases. An ideal market is that of a perfect competition where buyers and sellers have perfect knowledge of the product. These types of markets are however present in theory only and there are no real life examples of perfect competition. Market information is essential for the forces of demand and supply to reach the optimum efficiency. The best decision will be taken when both consumers and producers both have full knowledge of the market. This is desirable but unattainable.