However with the reduction of trade barriers in the American market during the 1980’s, the luxury automobile market saw increased competition from European and Japanese automobile makers. In terms of a supply and demand analysis, it is likely that there would be increased variety in the market of luxury automobiles and an overall increase in the supply of vehicles. It stands to reason that there must be a reduction the in price of American luxury automobiles to help increase quantity demanded to meet the new market equilibrium or improvements must be made to reduce the costs of manufacturing vehicles so that company profits can remain the same with a lower unit volume sale. The same kind of situation has occurred in Europe, with an over-supply of vehicles.
In Europe, the market appears to be flooded with automobiles now. The supply is high. In order to compete in this crowded market, companies will have to reduce their prices. Demand simply does not match the supply, therefore prices must be lowered.
Europe has almost 300 car and engine plants, according to the European Automobile Manufacturers’ Association (known as ACEA). Their collective capacity is thought to be about 27 million vehicles a year. Sales of new cars last year were just under 16 million and are expected to fall to as low as 14.5 million this year, according to Ford.
The capacity was established when demand was high, before the recession. Because car manufacturing is so capital intensive it is harder than other industries to be flexible to economic downturns. Manufacturers are therefore more vulnerable. They will make cars based on information from a year earlier and scale up their factories to do so, when it turns out demand is not as high as they thought it was because people are scaling back their spending on things like cars, they will produce an over-supply. They will then