Need help with Economics question

SophieRogan

I'm a first year business student and I have to repeat an economics module I failed in the summer (definitely not my strong point!).
As part of the repeat we have to answer a question given to us in advance for a certain amount of percentage. Its a vague enough question and I'm having some trouble with it, so any help would be greatly appreciated.
I'm not looking to cheat or have the question answered for me, just a bit of guidance.

"Use your knowledge of supply/demand analysis to examine what might occur in the following situation. Explain your answer. AMX car manufacturing company is launching a new model. It expects to sell 1000 cars per period of time. The list price of the new car is €20k. As events turn out demand is better than expected and AMX could sell 1500 cars per period of time. What might happen in the market for this new car due to this event and explain your answer."

So at first I thought that AMX could increase supply to 1500 to meet demand, but then realised that would bring the price up a lot and demand could fall. Is this correct, or are AMX in position to bring price up due to high demand?
OR, should AMX increase price (without invoking higher costs by raising supply) because of high demand?

Any guidance here at all? #confused

CillianL

SophieRogan wrote: »

I'm a first year business student and I have to repeat an economics module I failed in the summer (definitely not my strong point!).
As part of the repeat we have to answer a question given to us in advance for a certain amount of percentage. Its a vague enough question and I'm having some trouble with it, so any help would be greatly appreciated.
I'm not looking to cheat or have the question answered for me, just a bit of guidance.

"Use your knowledge of supply/demand analysis to examine what might occur in the following situation. Explain your answer. AMX car manufacturing company is launching a new model. It expects to sell 1000 cars per period of time. The list price of the new car is €20k. As events turn out demand is better than expected and AMX could sell 1500 cars per period of time. What might happen in the market for this new car due to this event and explain your answer."

So at first I thought that AMX could increase supply to 1500 to meet demand, but then realised that would bring the price up a lot and demand could fall. Is this correct, or are AMX in position to bring price up due to high demand?
OR, should AMX increase price (without invoking higher costs by raising supply) because of high demand?

Any guidance here at all? #confused

Alright Sophie I saw this post today, so I thought I could give some guidance at least.
I'm training to be an engineer myself but I'm interested in economics nevertheless and the problem you have is a simple problem of supply and demand.

It was Adam Smith in his book 'The Wealth of Nations' who brought about the idea of the invisible hand which regulates the supply and demand ratio.

It's when either ratio becomes unbalanced that the price of a commodity goes up or down sharply.
So a high supply with a low demand will result in very low prices whereas a high demand and a low supply will cause prices to rocket skywards. Companies exploit this all the time. Diamond companies limit the supply of diamonds to western markets to keep the price high, likewise Louis Vitton don't manufacture ship loads of bags because it would kill the 'exclusiveness of the brand' On the other end of the scale its because of gigantic supply that exports from China are so cheap.

In relation to this question, because demand for the car is 1.5 times the supply the company can either:

1.Allow the market price to rise and sell the car for 30K i.e 1.5 times the original price and except customer queuing for the product and drop the price back down in time as demand recedes

2. Increase productive capacity and chase the unforecasted demand and thus maintain the price at 20k.

When you said there that you thought the company could raise the supply to 1500 this wouldn't raise the price at all, it would simply stabilise the price and capture the demand.

(By the way if anyone can answer this question better go ahead and tell me why I'm wrong, I'm open to correction)

Think about the elasticity of demand - how elastic is the demand for cars?

Using first principles, describe what normally happens when demand exceeds what a firm thinks its will, reference your answer on elasticity.

Sketch it out and look to see where the profit maximising point for the car company is.

roro2

Try not to think about what the company should do - that's not the question. You don't have enough info to be that specific, e.g. you are only told what demand is for a given price, not what will happen to demand if the price is changed. If the price is increased by 50% (€30k), this does not necessarily mean that demand will fall by 50% (to 1,000) as this depends on elasticities.

The question is asking what might happen in the market - it's not asking specifics. E.g. if supply is maintained at existing level, what will happen to price (broadly speaking), etc. If supply is increased, what happens... You could also talk about how supply might be fixed in this industry for a period of time.