Chris Colin

Struan Taylor
12:20
An economic analysis on what is happening in the South African Motor
industry.

Economics 101 Essay 1
18 march
Abstract
The purpose of the essay is to give you a critical view on what is really
happening within the car industry and I plan to demonstrate and illustrate
what happens to the demand and the supply of entry-levelled vehicles in the
situation of the motor vehicles being over priced in the face of weakening
foreign currencies and a strengthening Rand. The issue was addressed by
looking at forecasts as well as the relationship between the demand and
supply determinants and backing up the motor industries theories.

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Conclusions were drawn based on the outcome of the simultaneous demand and
supply determinants as well as statistics over recent years proving
theories.


Introduction
With there being decreases in the Dollar, Euro and Yen, the prices of motor
vehicles are still consistently on the increase as well as “tariffs in
South Africa being reduced as well as local content requirements either
being relaxed or abolished” (Black and Mitchell, 2002:23), the price of
manufacturer input costs have decreased meaning that the quantity demanded
of these inputs has increased and with this in mind, there is a sense of
intervention of competitive manufacturers because this increases the
quantity supplied but this year there has still been an increase in
quantity demanded by the general public because of competitive rivalry as
well as lower interest rates in 2004 but the influence of foreign produced
goods lead to eventual price reductions.


Quantity demanded and quantity supplied for new vehicles in the industry
with regard them being over priced.

The demand for motor vehicles may be influence by forecast conditions put
out by the National Association of Automobile Manufacturers of South
Africa. Before, the economic analysis was taking place but the consumer
population forecast expected future price increases with full knowledge of
the decrease in manufacture import prices, they made use of substitute
models within the industry leading to a decrease in quantity demanded of
expensive models decreasing the gross profit of the car makers and causing
a shift in the demand curve to a decrease left. “It is expected that people
will continue to by less expensive goods, and these sales could represent
almost a set percentage of the total market by period end.”(Black and
Mitchell, 2002:34).


With this being said, this year the competitive rivalry within the motor
industry is “forcing narrower margins and smaller price increases”
(Business Times, 2001). From the start of this year (2004), there hasn’t
been a price increase and this is because of the reduction in interest
rates making cars more affordable and so the public can now afford to buy
the vehicles.

The supply of vehicles increased because of the fact that the price of
motor vehicle inputs have decreased due to foreign exchange weakening and
boosting imports and so there will be a shift in the demand curve to an
increase right. This level of quantity supplied increased and with the
quantity demanded decreasing and so there were simultaneous shifts of the
two curves at the same price level causing and this led to . (Black and
Mitchell, 2002:27) .There was also an increase in sales at a discounted
overpriced rate as well as improvements in technology.


The situation of an increase in quantity supplied may eventually lead to a
situation of over supply and may be forced to reduce prices in the face of
foreign 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 year
there has been a general increase in quantity demanded with an increase in
annual sales by 18% (Standard Bank, 2004) and this brings in the argument
on behalf of the Marius Burger (Toyota vice president) and this is because
he had the view that the prices were fair in the long term and the prices
have been forecasted to work out this year to the correct pricing and
without being under priced.

Another reason for the price increases in the short run is because there
has 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 erosion
and so there is a valid reason within the industry to keep prices at an
increase for export purposes (Moneyweb, 2004). There has also been an
increase in price inflation because of the fact that the car sales market
is small in relation to the population. “Vehicle sales take into account
price levels and disposable income, and factor into equation unemployment
of more than 30% and the fact that half of South Africans are currently
living under the poverty line” (Moneyweb, 2004).


Conclusion
Quantity demanded in these years were decreased because of forecasts
leading to consumers buying less expensive entry-level vehicles and making
use of substitutes as well as forecasts from critical reports. Quantity
supplied increased in these years because of simultaneous shifts demand and
supply with demand decreasing and supply increasing at the same price level
as well as supply increasing because of innovation within the industry.

Based on prices not forecasted to be increased in 2004 because of reduced
interest rates and increased sales, the equilibrium balance can be
concluded statistically to support the motor industry’s ideas on why the
vehicles are not over priced and support their theory on the prices of new
entry vehicles having changed in the face of short term economic conditions
because in the long run, vehicles have been under priced because of the
long 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?Ope
nDocument. 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 March
2004.