motor vehicle sales
1. explain why car sales in Britain have increased in recent times.
2. Describe how the vehicle scrappage scheme influenced the market equilibrium for older cars. Justify and explain your answer using appropriate diagrams where
necessary
3. What factors are likely to influence the price elasticity of Ford’s Fiesta car?
4. Outline the package of measures mentioned in the article designed to bring down costs and stimulate demand.
5. Explain the likely effect upon price competition of installing fuel price comparison signs on major roads. Make reference to the market structure of petrol
stations within your answer
Introduction
1. The increase of 12.5% in average monthly motor vehicle sales in the last five years UK is largely attributed to the hard economic times that kept the UK consumers from the car market. The good financing deals available and also the optimistic economic prospects in the UK looked promising. The economy of a country improves only when the disposable income of its citizens also improves. The average household in an economy accounts for almost thirty per cent of the total aggregate demand for all goods and services in an economy. The relationship between disposable income and consumer spending is positive. The consumption function gradient in these cases is positive and it’s known as the marginal propensity to consume. As the citizen’s income increases so does their consumer demand which results in more purchases of vehicles in these case. In these case the marginal propensity to consume has increased has resulted in more consumption of vehicles at each level. This is in accordance to Keynesian theory. The other factors like the stoppage of the scrappage scheme and the good finance deals are just but incentives to boost spending in order to increase the circulation of funds in the economy.
The Consumption and Saving Function
Consumer spending/saving
Income/saving C= a+ cYd
S = -a +s Yd
a
-a Disposable income (Yd)
2. In the short run, there will be an outward shift in aggregate demand for older vehicles as the demand for older vehicles will increase due to the scrappage scheme incentive but in the long run the aggregate demand for older vehicles will shift inwards as people begin to feel the effects of the promising economy and the good finance deals and discard the old vehicles while their prices will also drop to P2
Price P AS1
P1
P2 AD1
Y2 Y1 AD2 Real National Income
3. The price elasticity of ford will be influenced by the removal of the scrappage scheme, the UK citizen’s preference for exported products and the price of the vehicle. Its fuel efficiencies and durability will also affect its elasticities.
4. The subsidy granted by the UK government under the scrappage scheme is intended to stimulate the demand for new vehicles together with the affordable financial deals that have been provided by the government. The insurance premiums, freezing the costs of Mot tests and the affordable fuel sign projects are the measures taken by the government to bring down motoring costs and stimulate demand.
5. The eventual results of reduced fuel price signs would be that the Petrol stations that charge higher prices will lose their clients and in the long-run the prices of fuel will come down due to the natural laws of demand and supply. The demand for the affordable fuel will increase and the rest of the fuel stations will also reduce their prices.
Part B
1. In the long run, due to the increase spending by the UK citizens, the aggregate demand increases and the economy grows towards full employment of all the factors of production. Most firms will increase their prices in order to increase profits margins while the shortages of input factors will increase the firm’s costs of production. Inflationary gap will occur and the UK government will increase the interest rates to control the inflationary gap. (Blanchard, 2011)
2. P2
P1 AD2
AD1
National Output
The Interest rates would make goods and services more expensive and curb consumer demand from AD2 to AD1 hence the suppliers would also because of reduced price from P2 to P1 and they will supply less goods leading to reduced expenditure. (Sullivan, 2003)
3. Wage price spiral occurs whenever the price raises leads to even higher wage demands by workers as they try to live and maintain their real and normal standards of living. The higher wages that are above the gains in the productivity of labor results in an increase in per unit cost of labor. In order for firms to maintain their normal profits they also increase their prices. The processes end in a cycle over again and the inflation ends up being out of control.
4. The inflation would be low in the UK as a result of government interventions to maintain it that way. For example, between the years 1997 and 1998, the Bank of England increased the interest rates from an average of 6% to 7.5% these reduced the smaller inflationary gap’s trend that had started getting out of control.
5. The policies that I would recommend would be the ones to control inflation as the excess demand for motor vehicles and other services increase due to improved economy, inflation would certainly occur in the long run. I would recommend the use of monetary policies such as the use of interest rates to reduce the level of the actual aggregate demand. Higher interest rates would reduce the aggregate demand in the following ways; a). They will discourage borrowing in house-holds and also by companies. b) Increase the general rate of saving as the opportunity cost to save has also increased and finally the general increment in mortgage interest rates of payments will also reduce the disposable effective real income of the homeowners which will reduce their ability to incur extra expenses or spend. Fiscal policies such as higher taxes and other policies like wage control and supply side policies will assist the government to control the economic problems in the UK.
References
Sullivan, S. S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.
Blanchard, O. (2011). Macroeconomics Updated (5th Ed.) Englewood Cliffs: Prentice
