Free Essay On Automobile Industry
One of the majorly affected industries during the global financial crisis of 2007/08 in the United States is the automobile industry. The industry that is one of the leading manufacturing industry in the country saw a major decline in the number of vehicles made and sold during this period. After the financial recession, the industry took a long period to recover to its former position. Some of the dominant companies in the sector including General Motors and Ford underwent some major restructuring of their operations which saw them lay off some of its employees and shut down some of its production plants in order to cut on costs and ensure that their profitability was not affected. This essay, therefore, presents an analysis of the automobile industry including the market structure, income and price elasticities.
The United States automobile industry is predominantly an impure oligopoly market structure that is concentrated in Detroit, Michigan (Klepper, 2001). With a large number of buyers both from within and without the United States, the industry comprises of numerous manufacturers, but three firms have evolved to become the major players in the industry (Klepper, 2001). These are; General Motors, Ford and Chrysler (Klepper, 2001). These companies manufacture and sell cars that are mostly homogenous or differentiated from one company to another. The companies are big and take advantage of the huge economies of scale thereby barring new entrants into the industry especially those from the United States. This phenomenon makes the industry a natural oligopoly (Klepper, 2001). Just like any other oligopoly market structure, the US automobile industry is very competitive. The entrance of foreign companies including Toyota and Honda into the US market, high fixed manufacturing costs and low switching costs by consumers have further increased the degree of competition in the industry.
The elasticity of demand of a product is the measure of the degree of responsiveness of its demand in accordance to a change in an economic variable say, price (price elasticity of demand) or income (income elasticity of demand) (McCarthy, 1996). If the demand of a product changes with either a change in the price of the commodity or income of the market, the product is said to elastic. If the demand of the commodity does not change by a large proportion, then the product is said to be inelastic (McCarthy, 1996).
The price of a Ford Mustang in 2013 was $54,850 while in 2014 the price was $60,338, a 9.1 percent increase in price. The quantity demanded of the Ford Mustangs, however, increased by 25.5% (Guido, 2015). The price elasticity of demand can be equated by the change in quantity demand to the change in price. Using the above data, the price elasticity of Ford Mustangs is 2.8 (Guido, 2015). If the income of the market changed by 3%, then the quantity of Ford Mustangs demanded changes by 5.7% leading to income elasticity of demand of 1.9. Therefore, cars manufactured by Ford, especially Ford Mustang can be said to be elastic (Guido, 2015).
In conclusion, the car manufacturers in the United States produce various brands that are differentiated into several models with each model serving a certain income level of the market (McCarthy, 1996). Opportunity cost is a major determinant during the purchase of cars, therefore explaining the elastic nature of demand for cars (McCarthy, 1996).
Guido, B. (2015). Elasticity of the Ford Mustang. Retrieved from https://prezi.com/e-fg8c__rjkh/elasticity-of-the-ford-mustang/
Klepper, S. (2001). The Evolution of the U.S. Automobile Industry and Detroit as its Capital (1st ed.). Pittsburgh, USA: Carnegie Mellon University. Retrieved from http://www.druid.dk/conferences/winter2002/gallery/klepper.pdf
McCarthy, P. (1996). Market Price and Income Elasticities of New Vehicle Demands. The Review Of Economics And Statistics, 78(3), 543-547. http://dx.doi.org/10.2307/2109802