Globalization in the European Car Market - Essay Example

ASSIGNMENT The European Car Market The European car market is dominated by only a few competitors. The added ratio of these competitors is more than 70% of the total market revenue. For a market to be classified as oligopolistic, the requirement is that the added market share of the big 4 rivals should constitute to 40% of the total market. With such fierce competition, there is no reason that any car industry can fall under the category of a perfect competition. The goal of the oligopolies is mainly to attain a strategic edge over their competitor. The competing firms in the European market try to innovate and introduce new features in their respective models rather than reducing the prices to attract buyers. How to differentiate a car market from perfect competition To get an idea for the distinction of a car market from perfect competition we need to understand few concepts regarding the economic terminology related to costs and firm behaviour. Perfect Competition In the real world, there is no such market as a perfect competition as every firm tries to differentiate its product from others and perfect competition involves perfect homogeneity. Perfect competition occurs where every characteristic of competition is known to the seller and as well as the buyer thus giving all information to the market. Due to the interaction of forces of demand and supply the market price stays for all thus the firms become price-takers and mainly compete on the terms of cost only. This raises the issue of profit maximization and firms in the perfect competition tend to increase their profits by only reducing costs. Further the point that perfect knowledge about the market means that despite of how much a firm produces it will get the same price throughout its production schedule as in a perfect market the average revenue is constant and so is the marginal revenue thus implying that the price elasticity is zero thus a decline or raise in price would bring about no change to the total revenue. In the perfect market, demand tends to stay constant throughout and since the firms are small, increment to the cost will only add up to the loss. The perfect market is more vulnerable to competition as there are many buyers and sellers. So the effect of entry and exit of a single supplier does not play a major role in upsetting the market whereas in the oligopolistic case, the effect of exit of any one firm plays a vital role in changing the entire market structure. Product Homogeneity and competition Product homogeneity is another factor that deters the taxonomy of the car industry as being perfect. In a perfect competition, the products are considered as homogenous thus they share the same attributes as of their rival products. This again reflects the point that this market is more prone to price changes and therefore entry and exit of firms will keep on happening. Consider that if the car market is to be called as perfect market then there would be many firms wanting to join the industry to reap better profits as it is a growing industry and so addition of new firms would keep on expanding the market thus there would be a time when the supply of cars will exceed the desired demand thereby causing a decline in price making many firms lose out. Thus only short term profits could be achieved and further it is possible that the losing firms may not be able to cover up their costs even. The point to be raised is that is there a substitute use of the machinery needed to manufacture cars Probably not as the technology required to build car engines would be in appropriate to be applied to Water-filters or cigarettes. In this case if the demand for cars falls so can the producer make a sudden move and go into the cigarette industry Never, it is difficult to shutdown large plants in a short period of time. Economies of Scale The point from which the economies of scale start is hard to attain at the momentary run. Economies of scale reflects the efficiency of the firm in the long run and in perfect competition there is no long run for many firms as their average costs are high to compete with the falling prices. The fact that a car industry requires extreme entry costs that are classified as fixed costs or rather sunk costs, only a large scale production without the reduction or a relatively low reduction in price would ensure the recovery of the suck costs involved. In real terms the perfect competition only promises short term economic profits whereas the car market has to sustain a long term profit also. In the perfect competition, short run profits are primarily the 'abnormal profits' but as the time passes more entrants come in and the increased supply causes a reduction in price so these abnormal profits disappear within the short run leaving behind only zero profits (Accounting profits). This is not all; there are two types of economies of scale that cab achieved in the long run due to large production. The first one being internal economies of scale, these economies of scale rise from internal policies and controls. These include the managerial economies and technical economies mainly. The managerial economies explain that due to constant monitoring of the production and researches, the firm can derives ways to implement better strategies in order to attain a lower cost of production. The technical economies explain that in the long run, it is more prominent to adapt new and better technologies that will result in better cost management. The critical point reflecting the expansion of production scale is the 'Fixed cost' terminology as it gets smaller and smaller with the addition of each unit of output thus pulling down the average costs for the firm. Due to the above mentioned aspects, it is justified that the car market can be dominated by oligopolies instead of perfect competition due to major constraint that is cost. In other words, oligopolies do not just impose cost competitiveness rather they go for other strategic implants that benefit them in the future, as they are the players that tend to stay for long in the business. When it comes to competition form a new entrant, they can wipe out the competition with ease by offering the low prices, which is possible only due to large-scale production that cannot be achieved by small firms. ASSIGNMENT 2 Oil and Globalization The world is becoming a global village and the hunger for power is increasing day by day, as economies grow larger and larger. The globalization process has increased the trading regime between nations and thus many resources are required to fulfil the desired demands. Oil is one of those resources which was once considered abundant in supply but now the resource is near to exhaustion and there is no other substitute present to replace this necessity. However, a few resources might replace oil but are not efficient enough to provide with benefits. The need for oil in the global market is increasing at a rapid rate and the problem is that the oil wells are depleting fast so to curb the extreme demand the prices are set so high but still the demand is increasing. Oil producers are concerned about their future profits as well and therefore are charging high prices. The OPEC is a very strong cartel that deals with the supply of oil and so far it has been able to reap much revenue from the sources. Oil is used in many forms, petrol being one of them. Petrol is involved in combustion to produce carbon dioxide which is regarded as a threat to the global atmosphere so governments are also involved in raising the prices so high in order to curb the demand. From the economic perspective the restricted supply together with the increased demand are setting the prices higher and higher thus making it unfeasible for some firms to continue operations using oil without increasing prices which further leads to inflation. And since the world has become a global village then an economy's inflation becomes another economy's imported inflation thus the cycle effects all in the process. Demand Demand refers to the ability and willingness to buy a good at a given price. The law of demand states that "as the price of a product fall, its quantity demanded increases cetris paribus". This law holds true for every normal good and oil is a normal good. This also means that demand has an inverse relationship with price. Oil is a commodity that is low on substitutes therefore the effect of a substitute on oil demand is low. This case states that if the price of a substitute product falls then the demand for that particular product shall fall. In our case, Oil has low substitutes or rather the substitutes are not that efficient thus it creates too little impact on the oil industry. CNG is considered as a substitute for petrol but CNG deteriorates car performance and further it can not be used in powerful vehicles. Oil is transformed into 3 major types: 1. high-octane 2. Pure petrol 3. Diesel From here I would like to demonstrate why there is an increase in demand for oil. In the present age, people are going more towards high-end cars those are sports cars which merely run on high-octane or diesel thus increasing the demand for oil. Preferences in taste and fashion also cause a shift in demand and in our case there is an outward shift which means that the price has risen as people are more willing to pay a higher price. Further oil is not a free good, it an economic good. Economic goods are those goods that give a profit to their producers thus the producers are more than ready to accept the increased demand and charge a higher price. Oil also causes externalities as the machines run by oil produce fumes that are bad for the atmosphere thus here the market failure comes into play in which the firms forget all their social costs and concentrate upon making profits. At this time the government intervenes thereby limiting their consumption or charging a tax such that the firms reduce their supply. However the government does impose a tax on the consumption of oil as well which means that the demand should fall but this is not true. Since oil has already been classified as a necessity so it has a price-inelastic demand curve which means that increasing the price would add to the revenue instead of depleting it. Here the case for externalities is the cause for an increased price. The income of consumers around the globe is also causing an increased demand for oil. Oil is indirectly involved in the preparation/manufacturing of many consumer commodities and directly involved as a fuel for transportation purposes. The overall living standards of the world are rising and so is their income. An increase in income makes the consumer purchase more so the car market is experiencing a booming cycle and thus the demand for oil is increasing which is further raising prices. Supply A little about the supply side would also justify the increase in price for oil. The main reason behind the high prices is that the sources are depleting and firms want to retain their positions for a longer time. Therefore these oil producing firms/nations have formed a cartel that places a quota in the world market for oil. However we know that oil is a necessity so it has an in-elastic demand schedule, this demand schedule incorporated with a limited supply makes a small increase in demand turn into a large increase in price. To refrain from production, these firms are taxed and thus the prices again go up. This brings inflation in to the economy and further this cycle continues to run as there are no near substitutes for oil present in the economy and oil is limited in supply. Bibliography 1. Campbell R. McConnell, Stanley L. Brue (Author) Economics: Principles, Problems, and Policies, 16th Edition Irwin/McGraw-Hill; (2004) 2. Lipsey, Richarg G. Economics Pearson Canada; 11th Ed edition (2004) 3. Parkin Michael, Economics Addison Wesley Publishing Company; 7th edition (2004) 4. Richard G. Lipsey (Author), Paul N. Courant (Author), Christopher T.S. Ragan Microeconomics Addison Wesley; 12th edition (1998) 5. Sloman, John Essentials of Economics, Financial Times Management; 3 edition (2003) Read More