Struan Taylor12:20An economic analysis on what is happening in the South African Motorindustry.
Economics 101 Essay 118 marchAbstractThe purpose of the essay is to give you a critical view on what is reallyhappening within the car industry and I plan to demonstrate and illustratewhat happens to the demand and the supply of entry-levelled vehicles in thesituation of the motor vehicles being over priced in the face of weakeningforeign currencies and a strengthening Rand. The issue was addressed bylooking at forecasts as well as the relationship between the demand andsupply determinants and backing up the motor industries theories. Conclusions were drawn based on the outcome of the simultaneous demand andsupply determinants as well as statistics over recent years provingtheories. IntroductionWith there being decreases in the Dollar, Euro and Yen, the prices of motorvehicles are still consistently on the increase as well as “tariffs inSouth Africa being reduced as well as local content requirements eitherbeing relaxed or abolished” (Black and Mitchell, 2002:23), the price ofmanufacturer input costs have decreased meaning that the quantity demandedof these inputs has increased and with this in mind, there is a sense ofintervention of competitive manufacturers because this increases thequantity supplied but this year there has still been an increase inquantity demanded by the general public because of competitive rivalry aswell as lower interest rates in 2004 but the influence of foreign producedgoods lead to eventual price reductions. Quantity demanded and quantity supplied for new vehicles in the industrywith regard them being over priced.
The demand for motor vehicles may be influence by forecast conditions putout by the National Association of Automobile Manufacturers of SouthAfrica. Before, the economic analysis was taking place but the consumerpopulation forecast expected future price increases with full knowledge ofthe decrease in manufacture import prices, they made use of substitutemodels within the industry leading to a decrease in quantity demanded ofexpensive models decreasing the gross profit of the car makers and causinga shift in the demand curve to a decrease left. “It is expected that peoplewill continue to by less expensive goods, and these sales could representalmost a set percentage of the total market by period end. “(Black andMitchell, 2002:34). With this being said, this year the competitive rivalry within the motorindustry is “forcing narrower margins and smaller price increases”(Business Times, 2001). From the start of this year (2004), there hasn’tbeen a price increase and this is because of the reduction in interestrates making cars more affordable and so the public can now afford to buythe vehicles.
The supply of vehicles increased because of the fact that the price ofmotor vehicle inputs have decreased due to foreign exchange weakening andboosting imports and so there will be a shift in the demand curve to anincrease right. This level of quantity supplied increased and with thequantity demanded decreasing and so there were simultaneous shifts of thetwo curves at the same price level causing and this led to . (Black andMitchell, 2002:27) . There was also an increase in sales at a discountedoverpriced rate as well as improvements in technology. The situation of an increase in quantity supplied may eventually lead to asituation of over supply and may be forced to reduce prices in the face offoreign cheaper competition as a result of their fierce import competition. (Moneyweb, 2004)Unfair or fair?Last year, there was an increase in price by 2% (Moneyweb, 2004).
This yearthere has been a general increase in quantity demanded with an increase inannual sales by 18% (Standard Bank, 2004) and this brings in the argumenton behalf of the Marius Burger (Toyota vice president) and this is becausehe had the view that the prices were fair in the long term and the priceshave been forecasted to work out this year to the correct pricing andwithout being under priced. Another reason for the price increases in the short run is because therehas been exchange rate erosion over the last 30 years and in the short run,the current bout of strength in the rand hasn’t made up for that erosionand so there is a valid reason within the industry to keep prices at anincrease for export purposes (Moneyweb, 2004). There has also been anincrease in price inflation because of the fact that the car sales marketis small in relation to the population. “Vehicle sales take into accountprice levels and disposable income, and factor into equation unemploymentof more than 30% and the fact that half of South Africans are currentlyliving under the poverty line” (Moneyweb, 2004). ConclusionQuantity demanded in these years were decreased because of forecastsleading to consumers buying less expensive entry-level vehicles and makinguse of substitutes as well as forecasts from critical reports. Quantitysupplied increased in these years because of simultaneous shifts demand andsupply with demand decreasing and supply increasing at the same price levelas well as supply increasing because of innovation within the industry.
Based on prices not forecasted to be increased in 2004 because of reducedinterest rates and increased sales, the equilibrium balance can beconcluded statistically to support the motor industry’s ideas on why thevehicles are not over priced and support their theory on the prices of newentry vehicles having changed in the face of short term economic conditionsbecause in the long run, vehicles have been under priced because of thelong term exchange rate erosion that took place. References 1) BLACK, A. , MITCHELL, S. , 2002.
Appex Studies (Vol 78). Blackwell,England: Cambridge International Science Publishing. 2) MONEYWEB, 1997. Investment insights 2004. online. Available:http://m1.
mny. co. za/MNMentor. nsf/0/C2256A2A005298FAC2256E1500172019?OpenDocument. Accessed 16 March 2004. 3) BUSINESS TIMES, 2001.
Motor industry profitability 2001. online. Available: http://www. btimes.
co. za/97/0119/news/news5. htm#top. Accessed 16 March 2004.
4) STANDARD BANK, 2004. Industry research 2004. online. Available:http://ed.
standardbank. co. za/research/MOT0402. PDF.
Accessed 16 March2004.
