Slowing Car Sales to Hit Auto Makers Article - Essay Example

Article Summary An article with the “Slowing Car Sales to Hit Auto Makers” was posted on February 19, by the usa.chinadaily.com. This article was about the fall in demand of cars that may be prompted by the withdrawal of tax perks and more regulation of registration. This was supported by the two other related articles posted in the same website. The first one which was the article posted on March 3, 2011 with the title “GM Sales Growth in China Slows” was about the slower reported sales growth by GM in China in February 2011 and another article with the title “Weak February Auto Sales Split Analysts over Year’s Prospect” was posted on March 8, 2011. This article was about the slight drop in China’s passenger vehicle sales in February. 2. Introduction Economics is very essential because it affects our life everyday. As a worker and a consumer, we will have to make economic decisions like how to spend our income. Sometimes, the cost of all the goods and services that we need and want to buy is greater than our income. So, we have to analyze the situation and choose among our choices carefully. We make decisions about learning, working, earning and spending. And we can make all these decisions more effectively if we have better understanding of economics. A good way to start understanding economics is by examining how markets work and who participates in them. All these market participants come into the marketplace because they specific goals to satisfy. They have to pursue their self-interests; buyers maximize their incomes while suppliers maximize their profits. These maximizing behaviors are the driving force of market economies. But it is not just about the buyers and the sellers; governments can also affect the individual choices or influence the marketplace in terms of taxes. This paper will try to figure out how markets, specifically the auto markets, work and examine the factors that may affect the decisions of the participants in the auto market. Economic concepts like demand, supply, price and tax will be the primary tool that will be utilized in this paper. 3. Analysis A. Market The term market simply refers to a place or situation where an economic exchange occurs – where a buyer and a seller interact (Schiller 2006, 47). It exists wherever and whenever an exchange takes place. The exchange of money or resources with goods and services is the market transaction. And in every market transaction, there must a buyer and a seller. The buyer represents the demand side because they demand goods and services in exchange with their money while the seller represents the supply side as they will supply goods and services in exchange for the money. In this paper, the market to be examined is the auto market in China and its participants – the buyers of cars and the sellers or the auto makers like General Motors Co, Ford, Toyota and Mazda and the government. B. Demand “The Chinese lunar new year also bolstered demand for big-ticket items, but the following months could be challenging for automakers” (usa.chinadaily.com 2011, 2). For us to understand such statement, we should have the basic idea of what demand is. Schiller (2006, 48) defined demand as the buyers' willingness and ability to buy specific quantities of a good at alternative prices in a given period of time. It is inversely related to price. This means that the quantity of a good demanded in a given period of time increases as its price falls. This relationship is also referred to as the Law of Demand. In one of our articles, there was a recorded increase in demand for cars between December and January brought about by the tax incentives imposed by the government. Tax like sales tax affects the quantity of goods and services that consumers may demand. As it is an addition to the actual price of a good, the higher the tax imposed on the good the lesser quantity of that good the consumers will demand. For this purpose, Table 1 shows the effect of 10 per cent tax imposed on different prices of car. Price of Car Before A Tax 10 per cent Tax Imposed Price of Car After Tax $ 10,000 $ 1000 $ 11,000 $ 20,000 $ 2000 $ 22,000 $ 30,000 $ 3000 $33,000 $ 40,000 4 $000 $44,000 $ 50,000 $ 5000 $55,000 TABLE 1. COMPARISON OF CAR PRICES WITH AND WITHOUT THE 10 PER CENT TAX This only means that with sales taxes, prices of goods become higher. And with higher prices, consumers will demand lesser quantity of that good. That is why “industry wide car sales grew at a slower pace after China reinstated a 10 per cent sales tax on small cars this year and phased out subsidies for vehicles trade-ins in rural areas” (usa.chinadaily.com 2011, 2). So, with tax incentives given by the government to the buyers of cars, more people will be rushing to car showrooms because they are interested to make purchases. This situation will now create a high volume of demand in cars. Figure 1 shows the change in quantity demanded caused by taxes. FIGURE 1 The effect of sales tax on demand on cars But aside from price, there are other factors that may affect the demand. This includes tastes or preferences of consumers, their income, the availability and price of other goods, expectations about future economic conditions, the number of buyers and special factors like season, celebrations or occasions. “China’s passenger vehicle sales dropped slightly in February from last year…” (usa.chinadaily.com 2011, 2). This happened for some reasons. According to Lin Huaibin (usa.chinadaily.com 2011, 2) February is not a good indicator of overall market growth due to various factors such as Chinese New Year, consumers getting used to changes in policies and the rise in sales in January in advance to Spring Festival. C. Supply Supply is the quantity of a good a producer is willing and able to sell or produce at alternative prices in a given time period (Schiller 2006, 170). Sellers will sell only if they see that there is possibility to earn profits and will expand their production as long as their profits are increasing. Their production decisions may be affected or influenced by the price of factor inputs, technology, expectations and taxes and subsidies. “But Lin of IHS Automotive, still expects the market to grow 10 percent in 2011, stimulated by the subsidy for fuel-efficient vehicles as well as more than 9.5 percent GDP growth forecast by the company’s economist” (usa.chinadaily.com 2011,2). Taxes and subsidies have opposite effect on the supply. Tax on businesses can decrease supply because of the additional cost to the cost of production while subsidies can increase supply because of the discounts in the cost of production. Taxes causes the supply curve to shift to the left which means there is a reduced supply. On the other hand, subsidies cause the supply curve to the right which means there is additional supply. This situation will send a signal to the automakers to expand their productions and such actions increases the supply of cars available to the automarket. The Gross Domestic Product (GDP) measures the economic performance of a country. A growth in GDP tells that the country’s economy is in a healthy position. Usually, businesses are encouraged to participate in economic activities when they know that the economy is doing well. So, from our article, if the GDP is forecasted by the company’s economist to grow by more than 9.5 percent, then automakers are expected to increase their productions. FIGURE 2 The effect of taxes on supply of cars Figure 2 shows the effects of taxes on supply of cars. Before imposing tax, the supply was described by the supply curve S and price was set at P? and quantity supplied was at Q?. Because of the sales tax imposed on cars, supply curve S shifted to S + tax curve and price was raised to P? from P? while there was a reduction in quantity supplied from Q? to Q?. D. Equilibrium Equilibrium is the state of being balanced. And in any economy, equity is perceived as an economic goal. In a free market, it is believed that the market has its self-clearing mechanism. The invisible hands and the market forces work to achieve equilibrium where excesses in the market are cleared. An excess in demand results to shortage while an excess in supply leads to a surplus (Mankiw 2004, 95). But because markets failed and resulted to several recessions, the other economic agents like government have to intervene through the use of taxes and other strategies to bring back the balance. Figure 3 The effects of sales tax on the equilibrium Figure 3 shows the effect of sales tax on demand, supply and the equilibrium. Before sales tax was imposed, equilibrium was set at point A, where price was at P? and quantity was at Q?. Sales tax push price P? to a higher price P? and caused the supply curve to shift to curve S + tax. At higher prices, consumers are less likely to make their purchases resulting to a lower Qd? and the equilibrium was now set at higher price P? and lower Q?. 4. Conclusion The market imperfections present in the economy caused many of the problems in the free markets (McConnell and Brue 2005, 145). This is one of the reasons why the need for government interventions was raised. As in the article, subsidies are given to reduce the burden made by tax to both consumers and producers. But this made consumers to purchase new or additional cars. And problems may arise in the process of registration and the traffic that too many cars will create in the streets of Beijing (usa.chinadaily.com 2011,3). Bibliography Mankiw, N. Gregory. Principles of Macroeconomics. Ohio: South-Western, 2004. McConnell, Campbel, and Stanley Brue. MICROECONOMICS: Principles, Problems and Policies. New York: McGraw-hill, Inc., 1993. McConnell, Campbell, and Stanley Brue. Macroeconomics: Principles, Problems and Policies. New York: McGraw-Hill Companies, Inc. , 2005. Miller, Roger LeRoy. Economics Today: The Micro View. Boston: Pearson Education Inc., 2004. Schiller, Bradley R. The Micro Economy Today. New York: McGraw-Hill, 2006. usa.chinadaily.com. GM's sales growth in China slows. March 3, 2011. http://usa.chinadaily.com.cn/business/2011-03/03/content_12109183.htm (accessed April 7, 2011). —. Slowing car sales to hit automakers. February 19, 2011. http://usa.chinadaily.com.cn/business/2011-02/19/content_12044133.htm (accessed April 7, 2011). —. Weak February auto sales split analysts over year's prospects. March 8, 2011. http://usa.chinadaily.com.cn/business/2011_03/08/content_12134083.htm (accessed April 7, 2011). Read More