Economics Individual Assignment -- Volkswagen
Company Overview
Volkswagen is a German automobile manufactured headquartered at Wolfsburg, Lower Saxony, Germany. It was founded at 28 May 1937 and it is the biggest automaker at German and the third largest in the world. (Wikipedia, 2013) The first Volkswagen actually is a Porsche design. Ferdinand Porsche, who has his own engineering consultation firm, the chief designer for Daimler Benz, Auto-Union was in charge in designing Volkswagen – ‘The people’s car’ by Adolf Hilter. (Tony & Hamer.M , 2013) Volkswagen company group was officially launched in Malaysia on 16 February 2006. (Volkswagen Malaysia, 2013) The product produce by Volkswagen is automobiles and they are luxury goods. Automobile is the final goods that can satisfy the needs of people. Sometimes there are scarcity of the automobiles due to the excess of unlimited human wants to the limited resources.
Demand
The demand curve is negative slope because the law of demand say that the higher the price, the lower the quantity demanded. When the price of a good is high, people will demand less. There is an equation for quantity demanded, Qd=a-bP , a is y-intercept while b is the slope of the curve.
For example,
P, price
|
Qd, quantity demanded
|
2
|
8
|
3
|
4
|
8 = a-2b, 4 = a-3b
b =4, a =16, Therefore, Qd =16-4P
Since cars are luxury goods, at 2008, during the financial crisis, the global financial downturn, the sales of Volkswagen decrease from 230,573 units at 2007 to 223,128 at 2008. There was a decrease of 3.2% compare to year 2007. (Agent009, 2009)
During the financial crisis’s year, the income of people decreases, the purchase power decrease, therefore the quantity of demand for Volkswagen’s automobile decreases. The decreases of demand affect the demand curve shift to the left from D1 to D2. Besides that, when there is special promotion at another car’s firm, people demand for the cheaper car and cause the quantity of demand for Volkswagen’s automobile decreases.
Based on the figured given by Cain.T (2011), the demand for Volkswagen beetle increases from 2012 to 2013 in U.S. This is because the preference of population towards the unique design of the car that increase the quantity of demand. Therefore, the graph below showed that the demand curve shifts to the right from D1 to D2, the price increase from P1 to P2 and the quantity increase from Q1 to Q2. Besides that, there are a lot of advertisement of Volkswagen that attract people to buy their cars. This had increase the quantity demand of Volkswagen’s automobile. They are even giving low interest rate for attracting the customers. Apart from that, the salesman are even giving special personal discounts to customers. Based on Daily Express (2013), Volkswagen sold 13,002 units and it is increase 77% from 7,350 units in 2011. This showed that the demand for Volkswagen in increases. From the Automobile Magazine(2013), it showed that there is cash back when buying the car. This cause the quantity of demand of the car increases too.
Increase in Demand
Advertisement of Volkswagen.
Supply
All the imported automobile will be taxed in Malaysia.
When the cars are being taxed (wikipedia, 2013), the cost of car increase, the suppliers will reduce the production of car, therefore supply decrease, the curve shifts to the left from s1 to s2. The equilibrium change from c to c1. This lead to the increasing in price and the decreasing in quantity and formed new equilibrium.
Based on Dr Zeno Kershbaumer, the managing director said that the Volkswagen polo sedan is the best seller and is expected that it will contribute 25% of total sales this year(2013). (Daily Express, 2013) . Therefore, they will increase the supply to fulfill the satisfaction of customers. When the company expected that the demand for their car will increase in the future, they will increase the quantity of supply. The supply curve will shift to the right from S1 to S2. Besides that, the most significant factor that increase the supply is the technology. When the technology used in the firm is more high technology, time taken to finish a car is decrease, the cost to produce the cars decrease, the firm is willing to supply more quantity of cars when the cost is low. Therefore, the quantity of supply increases. Apart from that, when the spare parts or materials to produce a car decreases, the firm will increase the supply too to achieve low cost high profit.
Elasticity
The income elasticity of demand for various types of cars was estimated by Bordley and McDonald (1993).The average of income elasticity for all types of cars was 1.8. (Pearson,2010)
Car Model
|
Income Elasticity
|
Accord
|
2.2
|
BMW 700 Series
|
4.4
|
Buick
|
2.8
|
Cadillac
|
3.3
|
Camry
|
2.3
|
Chevette
|
1.2
|
Civic
|
2.6
|
Corvette
|
3.2
|
Grand Am
|
1.8
|
Jaguar X-Type
|
4.5
|
Jetta
|
2.1
|
Maxima
|
2.5
|
Mercedes
|
4.4
|
Mustang
|
1.9
|
Olds
|
2.4
|
Porsche
|
4.2
|
Taurus
|
2.1
|
Volvo
|
3.4
|
Therefore, the income elasticity of Volkswagen’s automobile is also more than one, Ey>1 since it is luxury goods, this is because the changes of percentage of quantity demanded is greater than the changes of percentage in income. Ey = % changes in quantity of demand / % changes in income. The higher the amount of Ey, the more the elasticity.
From the table above, the elasticity of demand (Ed) in 2005,2006,2008 and 2009 showed that Ed<1, therefore the Ed for the stated year is inelastic. This means the changes of percentage of quantity demanded is smaller than the changes of percentage of the price. While for the year 2007, the elastic of demand is greater than one, the demand for Volkswagen was elastic. This shown that the changes of percentage of quantity demanded is greater than the changes of percentage of the price. People in year 2007 choose another automobile’s firm when the price of car of Volkswagen is increases. The higher the number of elasticity, the easier the people demand for substitute good.
Market Structure
In essence, the company of car is in the oligopoly’s market. There are only a few number of car’s firm, for example, Toyota, BMW, Honda and etc. It has barrier to enter the industry because it needs a big amount of capital to invest in this industry and access to expensive and complex technology. In oligopoly, they are price setters rather than price takers. There are competition between the small amount of large firms that have market power. Therefore, Volkswagen is coming out with their competitive strategies to compete with their rivals. Volkswagen Group engages in Mach 18 Program to promote the company to become the leader of automobile manufacture by 2018 in the world. ( Microsoft, 2012) Apart from that , each firm does not consider the actions of other firms because the demand for car is still depend on people’s preference, thus, behavior is interdependent. But when one of the firm lower their price, the other firm may lower the price too. This is to compete with the rivals.
Maximise profit
Based on the data from Volkswagen group (2011), the income statement showed that the total sales revenue in 2011 was 159,337 million and the total cost of sales was 131,371 million. Therefore, the total profit for 2011 was total sales revenue minus total cost equal to 27,966 million (159,337-131,371=27,996). Besides that, the sales revenue of 2011 increased by 25.6% to
Since the Volkswagen’s automobile gained profit every year, they produced a graph as below.
The firm maximize the profit at MC=MR, the grey part is the profit of the firm. Average revenue (AR) has to greater than average cost (AC) to gain profit. This profit also known as abnormal profit. The firm should produce more output as an additional unit increase the revenue greater than cost. When the MC is greater than MR, the firm should decrease the output because the loss is occurred.
Minimum Wages
Volkswagen in Malaysia faced the minimum wages for the workers on July 2012. Minimum wages is the lowest salary the employers should pay to the employees. Besides that, minimum wages is the amount that set above the equilibrium wage rate to take care the benefit of labors.
When the minimum wages is set above the equilibrium, the supply of labor is more than the demand of labor, this lead to unemployment and surplus of labor. This is due to when the wages is high, it is expensive for firm to hire labors, therefore they are hiring fewer labors. This is also decrease the employment of low skill young labors because the firm will think that it is more worth to employ someone with high skill.
References
Agent009 (2009) Auto Spies Auto News.
Available from:http://www.autospies.com/news/Volkswagen-Sales-Drop-14-4-In-December-Ends-2008-Down-3-2-39462/[Accessed 17 October 2013]
Cain.T (2011) Volkswagen Beetle Sales Figure.
Available from:http://www.goodcarbadcar.net/2011/01/volkswagen-beetle-sales-figures.html[Accessed 21 October 2013]
Available from: http://www.dailyexpress.com.my/news.cfm?NewsID=86047 [Accessed 21 October 2013]
Microsoft (2012) Case Study.
Available from :http://www.microsoft.com/casestudies/Microsoft-Enterprise-Strategy-Services/Volkswagen-Group/Volkswagen-Aligns-IT-and-Business-Goals-Reduces-Costs-with-Strategic-Engagement/710000001422 [Accessed 21 October 2013]
Pearson (2010)
Available from:http://wps.aw.com/aw_perloff_microecon_5/85/21981/5627384.cw/content/index.html[Accessed 17 October 2013]
Slide Share (2013) Elasticity of Demand Analysis - Volkswagen case study.
Available from:http://www.slideshare.net/hemantasahu/volkswagen-elasticity-of-demand-6847726[Accessed 18 October 2013]
Slide Share (2013) Long Run Production and Cost Theory.
Available from:http://www.slideshare.net/boxonomics/long-run-production-and-cost-theory[Accessed 18 October 2013]
Tony & Hamer.M (2013) History of the Volkswagen.
Available from:http://classiccars.about.com/od/classiccarsaz/a/volkswagen.htm[Accessed 17 October 2013]
Volkswagen Group (2011) Annual Report 2011- Letter to Our Shareholders.
Available from:http://annualreport2011.volkswagenag.com/strategy/lettertoourshareholders.html?cat=b[Accessed 21 October 2013]
Volkswagen group (2011) Annual Report 2011-Income Statement.
Available from:http://annualreport2011.volkswagenag.com/financialstatements/incomestatement.html?cat=b [Accessed 18 October 2013]
Volkswagen Malaysia (2013) About us.
Wikipedia (2013) Volkswagen.
Available from:http://en.wikipedia.org/wiki/Volkswagen [Accessed 17 October 2013]
Wikipedia (2013) Malaysian Motor Vehicle Import Duties.
Available from:http://en.wikipedia.org/wiki/Malaysian_motor_vehicle_import_duties[Accessed 21 October 2013]
Wikipedia (2013) Malaysian Motor Vehicle Import Duties.
Available from:http://en.wikipedia.org/wiki/Malaysian_motor_vehicle_import_duties[Accessed 21 October 2013]
Automobile Magazine (2013) Volkswagen beetle rebates, incentives and deals.
Available from:http://www.automobilemag.com/am/99/2013/volkswagen/beetle/25_hatchback/1879/rebates.html[Accessed 21 October 2013]
