Insurance Expense for the Car Assembling Machinery - Assignment Example

1) a) i) Labor -> Assembly workers and painters ii) Capital -> Car Assembling Machinery iii) Land -> Company’s production plant b) A fixed cost is an expense that remains same whether the output is nil or it very large. This type costs do not change with the output level and are constant in the short-run. Similarly, variable costs are expenses that vary with the level of output that is if you produce more you will have to bear more variable costs than if you produce less. Example of Fixed Cost: Insurance expense for the car assembling machinery Example of Variable Cost: Wage bill of assembly workers because if more cars are to be produced, workers will have to put in more hours and as a result wage bill will increase. 2) a) b) Initially before the “scrappage scheme”, the initial equilibrium was set at the point E, the point of intersection of S and D curve. At this point the equilibrium price was P. However, after the government offer of giving incentive to people which acted more or less the same way of a subsidy, the supply of cars increased from S to S1. The new equilibrium was not set on the intersection of S1 and D curve at the point E1. Here the new price was P1. From the diagram, we can see that the government policy has decreased the prices from P to P1 and increased the sales from Q to Q1. c) The result of this policy would have been that more cars were scrapped rather than entering the market for second-hand used cars. This would have considerably reduced the supply in the second-hand car market. As a result of this, the supply curve would have moved to left, increasing the prices in the second hand market and reducing quantity of cars being sold in the second hand market. d) i) Increase in Income ii) Increase in the credit facility for buying of cars 3) Opportunity cost is the next best alternative forgone by choosing the best option. The opportunity costs for government of the UK’s government for financing this scheme could have been improving the road infrastructure in the metros of the United Kingdom. This means that by choosing to finance this scheme, the government is not being able to pursue its other aims. 4) a) The price elasticity of demand is responsiveness of demand to the changes in price of cars. Since, in London people have a higher income, it is considered as status symbol and because it has become somewhat a necessity, as a result people have higher price elasticity of demand in London than in South west, where people have a comparatively lower income and less class consciousness. b) i) This can be done by informing people about the environmental benefits of the car and by telling them that these cars would eventually save them a lot of money, once the oil prices go out of control. ii) This will help the firm to raise prices without losing too much of their customers. Consumers often shift away from the product if the price of a product increases, in case of high price elasticity of demand. So, the firms can benefit by low price elasticity of demand because any increase in price will go unnoticed by the consumers and they will not shift away to alternatives or other products in response to increase in price, if price elasticity of demand is low. c) The relation between YED and hybrid cards will be positive. Since hybrid cars are expensive, people will not buy them unless they earn a good income. Similarly, those people who have low incomes won’t be able to afford the luxury of hybrid cars, but if their income increases they will buy such cars to save them from petrol costs. As a result of this, YED or income elasticity of demand of hybrid cars will be positive i-e greater than 0. d) One determinant of pes in the car manufacturing industry can be the production capacity available to a firm as compared to the demand of cars in the market. If demand is really high and spare production capacity is low, then the firm will burden the buyers with increased prices. 5) a) Economies of scales are reduction in average cost as the firm increase the span of production and widens the scale of its operations. b) i) Technical economies: These are present in the car manufacturing industry because of the advanced technical machineries they use which decreases the average costs ii) Similarly, in the recent years the car manufacturing has grown and external economies of scale have come into effect. For example, a lot of suppliers and supporting industries have also grown simultaneously to cater the needs of this industry. 6) a) i) What is the level of competition in the industry (industry size) ? ii) How many buyers are in the market? iii) The degree of control that firms have over the price in the industry? iv) Is it easy to enter or exit industry? b) i) The level of competition in the industry: There are many companies but Big five companies rule the market and constitute about 95% of the total car manufacturing ii) The degree of control that firms have over the price in the industry: Almost all the firm have control over their own prices because of differentiation in the products, the brand name and features different companies offer. iii) Is it easy to enter or exit industry: Entry and exit is difficult because large investments and sunk costs. The UK Automotive industry resembles the oligopoly market structure. 7) a) One of the causes of market failure could be that when setting the price of hybrid cars, the costs of environment will not be taken into account i-e how much benefit does hybrid cars render to the environment. Similarly, the cost of environmental damage that the manufacturing of car takes into account will also not be taken into account. This would mean that the actual registered demand will be more or less than if these environmental costs and benefits are taken into account and as a result the market would fail. There will be either under-production or over-production of the cars than the actual quantity that should be produced. b) Government can solve the problem by levying a fine on the car manufacturing firm on every car produced for the environmental damage it creates. This would increase the cost of the car and as a result the quantity demanded will be less and the problem of over production would be solved. Similarly, government can run campaigns giving awareness to people about the hybrid cars and how they will help the environment. This will increase the demand of cars than if these benefits are not known and will solve the problem of under-production of hybrid cars. References: House of Commons Report. (2005). Report on the UK automotive sector. Retrieved on 12 April 2010. John Sloman (2001). Economics. Pearson Publishing Collin Bamford. (2003). As and A Level Economics. Cambridge University Press. Lipsey and Chrystal. (2002). Economics. Oxford University Press. Manuel G. Velasquez (2001). Business Ethics: Cases and Concepts. Prentice Hall Pindyck and Rubinfield. (2003). Economics. Prentice Peter Stimpson. (2002) Business Studies. Oxford University Press (2002) McConnell and Brue. (2004). Economics. Prentice Read More