Automotive Production Levels - Research Paper Example

It is price which either actually exists in market or market is moving towards it assuming no market impediments or government policies exist to prevent equilibrium to be reached. At equilibrium price, both forces do not have any tendency to change, provided all other things remain same (Abel and Bernanke, 2005). If all the conditions of free market are met, then GM should have been able fetch sales of 2478001 units of vehicles in second quarter. If compared this figure with its last two quarter units sold, there exits a gap of 87000 vehicles in all.

Price elasticity of demand is a quantitative measure (coefficient) showing percentage change in the quantity demanded with respect to percentage change in price (Leamer, 2009). Price elasticity for second quarter of 2012 for GM motor is – 0.95. Negative coefficient of price elasticity shows negative relation of price and demand. Categorization is made based on where the elasticity coefficient lies from 0 to 1. Price elasticity of GM being -0.95 refers to inelastic demand. It refers; only large proportionate change in price can bring small proportionate change in demand which results in steeper demand curve.

This kind of elasticity is usually for products that are considered necessities and importance of vehicle has no question in every aspect from business to personal lives. Since it has inelastic demand and there lies a gap between equilibrium price and average unit price of about $ 4000.00 i.e. 19,558 - 15,527 respectively, management can increase profitability by increasing it price that will finally benefit its total revenue which is going negative. If calculated elasticity is considered to be of another brand say A than comparison would guide the future strategy.

For instance, if competitor’s brand A increases prices by the differential discussed in previous question, then there is little chance that its customers would switch to ours due to inelastic demand.