400 words Question 3 Explain the concept of demand curve and the determinants/factors that can influence...

Question 3 Explain the concept of demand curve and the determinants/factors that can influence the demand of a product/service, using concepts from Block 5, Reading 40. Using these concepts, and the information from the case study, explain and discuss the determinants/factors that are affecting the demand for Tesla cars. (30 marks)

:)'. Tonline) shim Acces Reading 40: Supply and demand Introduction able at http:// y (Accessed 24 e Economist, com/news *t-five-years ly the prices ople why the pe of fight tickets why the pe ec.europa.eu This reading focuses on a key economie principle: the formation of prices through the interplay of supply and demand. This will help you to appreciate better, for example, why the prices of hotels go up during holidays, why the prices of summer clothes go down at the end of the summer, why the prices of flight tickets go up when the date of travel is closer to the purchase of the tickets, and why the prices of mobile phone tariffs have gone down in recent years after the increase of the numbers of operators providing mobile phone services. However, in order to understand supply and demand you need to understand first the concept of market. A market can be defined as a place where buyers and sellers come together in order to trade goods and/or services (Sloman, 2008). There is a market for most goods and/or services solde thus, for example, we can have a market for oranges, for cars, for houses for mobile phones, for insurance or for shares in companies There are not only physical markets, but also virtual markets where economic activity takes place. Examples of physical markets are a street market, whereas websites like amazon.com, ebay.com or taobao.com are nomie and etp://ec. crisis 214). in the examples of virtual markets. Example of a virtual market: Taobao China's Taobao is one of the world's largest e-commerce websites, like a combination of eBay and Amazon, only bigger. Its 500 million registered users trade almost 50.000 items of merchandise every minute on average. Taobao has two major platforms: the TMall, where established brand owners sell directly to customers, and the Taobao Market place, where smaller companies and budding entrepreneurs set up shop. On 11 November 2013 when Taobao held its annual big sales day, goods worth 1 bn yuan were traded in iust over six minutes and the total sales for the day amounted to more than 35 bn yuan (the equivalent of US$5.6bn or £3.45 bn). With more than 800 million items listed, you can find almost anything offered for sale on the website. (Xu, 2014) All markers underpinned by the forces of supply and demand. The basic principle that if a good is sold by many suppliers, but few buyers are interes t emanding (buying) it, the price of that good is going to decrease. gely, if many buyers are interested in demanding a particular and there are few suppliers, the price of that good will increase reading will look in more detail at this phenomenon. An important point to make right at the beginning is that demand and supply only work exactly like in this model when markets are perfectly competitive. For markets to be called perfectly competitive, they must meet some precise conditions (Colander, 2006, p. 253):

hey cannot indepen the going rate and sellers and price makers, leth and firms are all searching ching for pro The both buyers and sellers are price at wer prices but have to buy or sell at the the number of firms in large and is cun easily emern • to entry or ENTE, Le new firm of demand and existing firms od seller knows te information, le every buyer and so there are no barriers to entry marker if there is a lot of demand the marker if there is not enough demand firms products are identical . there is complete information, ie everything about all other buyers and seller Don't worry at this point if you don't under Jeam more about perfectly competitive (and oth Reading 42 allers' products and price understand some concepts. Y other types of markets s. You will all other things being or held constant phrase often used in king through the definitie actually exist; it is an absı an abstract the language of close to the condition As you willdy competitiverkets that are somew! above, there are some bat the general interplay of supply and del ts are not even close to arkets, buyers and sellers de rmation about each other conomics. Many rules or propositions in onomics are true only if the ceteris paribus clause is satisfied ch other and bere are also many and sellers. As you will probably have realised when looking above, perfectly competitive markets do not actu cent. There are some markets that are somewhat of perfect competition, so that the general interplay can be observed. However, the majority of markets ar conditions of perfect competition. In most markets not have anything even close to complete informatie about the nature of the products and services markets where there are only a fairly small nun and where there are indeed significant barriers markets are also strongly influenced by govern change the behaviour of buyers and sellers. products and services on offer. There a nly a fairly small number of buyers and unificant barriers to entry or exit. Man nenced by government intervention, whic which can 1 Understanding demand out three very important things: the and and prices (the so-called law of demand); the tors beyond price that may In this section you will learn about three very important thing relationship between demand and prices (the so-called concept of price elasticity of demand; and the factors beyond influence demand 1.1 The law of demand In economics, demand for a given good and/or service represents the amount of that good and/or service that people are both willing and able to pay for at a given time (e.g. Antonioni and Flynn, 2011; Colander, 2006: Katz and Rosen, 1998; Sloman, 2008). For example, if you are a consumer that likes luxury cars but you don't have the money for buying them, then you aren't part of the demand for luxury cars. Mover, we need to distinguish between two slightly different conceptuantity demanded and demand. The quantity demanded refers to how much of a good and/or a service consumers demand at a specific price given their income and preferences, demand means the whole range of quantities that a consumer with a given income and preferences demands at different prices (Antonioni

The Open University Cuero BUSINESS SCHOOL m There tessen Chris paribus, mer other things being sul or held constant' is phase often used in the language of conds. Many rules or propositions in conomics are the only if the celeris paribus clause is satisfied. and Flynn, 2011. p. 173). You will see that it is fairly easy to distinguish between these two concepts The relationship between demand and prices is known as the law of demand. This law is based on the following principle: considering all other things being equal or held constant (the so-called ceteris paribus clause), v the price of a good tises, the quantity demanded of the same good will fall This will happen because consumers will be able to affordless of the new more expensive good, so they will either reduce their consumption or they will try to look for alternative or substitute goods. The first situation is known as the income effect, whereas the second situation is known as the int substitution effect (Sloman, 2008, p. 35) The relationship between demand and prices is shown by the demand curve More specifically, the demand curve is the graphic representation of the relationship between price and quantity demanded (Colander, 2006, p. 91). We could have the demand curve of an individual consumer or the aggregate demand of all the consumers in the first case, it is called the individual demand curve, whereas in the latter case it is called the market demand curve. The term curve is used even if the graph has different forms. Figure I highlights the market demand curve for an annual one-year course on management ("Certificate of Management) offered by a single university in distance learning. As you can see in this hypothetical example, if the price is £5.000 the number of students (quantity demanded) that are willing to attend the course is 100; if the price goes down to £2,000, the number of students increases to 400. Of course, estimating the trend of demand is not an easy exercise and it is usually based on the results of specific market 7 to the and BUL surveys. Price (thousands of E) 0- 0 100 700 200 300 400 500 600 Quantity demanded Figure market demand curve for attending a management course The manoramand curve is intended to show the total demand in the market for attending a management course offered by a single UK university. In particular, the demand curve shows how the quantity demanded changes in relation to different levels of price. There may, of course, be other price points, for example you might be willing to pay £10,000 for attending this management course because it can increase your chances of promotion.

award showing tity demanded relationship exists between he good of Service he good or service are exceptions, for in American economist, one of the demand curve is dow exists between price and quan un fewer consumers will demand the down, more consumers will want the vast majority of cases, although there a goods. Thorstein Veblen, an Am influences on consumption and noted kinds of goods may be in greater demand ane luxury items, such as luxury cars, iesa wines, etc. (Veblen, 1899). Here. th luxurious it is thought to be and low likelihood, lead to much increased demand. among the other thi od at higher prices jewellery, designer higher the price of a 999), Here, the higher the price to be and lowering the price Comment Figure 3 bilo Tour OON between the given The Xple on apples 120 Exercise 1 Spend no more than 15 minutes on this exercise 110 100 Price in perce per kg Figure 2 Apples Consider the market for apples and consider the different quantities demanded at different levels of price as shown in Table 1. Table 1 Prices of apples and corresponding que des demanded Price of apples (pence per kg) and Total market (tonnes) 5000 4000 3000 2000 70 90 110 1000 different levels of price from 0 to 110 per also called the y axis in graphs like th demanded from 0 to 5000 tonnes aw the demand curve in a two-dimensional line chart putting the levels of price from 0 to 110 pence on the vertical axis (which is his, and the different quantities 0 to 5000 tonnes on the horizontal axis (also called the X axis).

Univers Comment area below how the demand cure you will have pro B e above. The five point thated in the line represent the main between the price and the quantities demanded at the tive quante ven. The curve also allows us to estimate intermediate ponto ample, at 100 pence per kowe would estimate to sell 1500 tonnes of apples 120- 110 sen Price in perice per la 1000 2000 3000 4000 Demand in tonnes 5000 6000 Fiqure 3 A demand curve for apples 1.2 The price elasticity of demand A caid before, in the vast majority of cases (excluding for example the Wahlen goods) there is a negative relationship between price and demand. In other words, if a firm raises the prices of its products, it will expect a decline in the level of sales. However, the extent of this change in demand is not the same for all goods and services. If the price of an essential good doubled, such as say winter fuel, people would probably try to be more energy efficient but they would not stop buying fuel to heat their houses. On the other hand, if the price of, say, cinema tickets suddenly doubled the drop in demand could be much greater as - unlike fuel-cinema is not an essential good. Therefore, firms want to know the extent to which demand changes after a change in prices. Price elasticity of demand (PED) measures the responsiveness of the quantity demanded to a change in the level of the price, and it indicates how much the quantity demanded of a good varies when the price increases or decreases by a certain percentage. The PED is calculated as follows: Percentage of che in the quantity demanded PED = Percent change in the price

The Open Universe proofreading, etc.). Therefore, the c o n trun tram 1000 100 books will be less costly than producing the first 100 bones You have now seen that knowledge of the price elasticity of demand for its products is very important for every company in making decisions what ricine. This is further illustrated in the example below. price sen Example of price increases: Royal Mail stamps Figure 4 Royal Mail stamps Reitons shun Christmas cards after stamp price rise ens fewer Christmas cards will be sent this year as consumers tact met Royal Mail's steep increase in the price of stamps Hall of Britons - the age of 50 plan to cut the number of cards they send because of the of stamps, according to a poll of 10.000 people for this newspaper The Telegraph] by Saga. average number of cards sent per person will fall by a quarter from 38 last year to 28 this year. Ros Altmann, saya e Altmann, Saga's director general, said that December will be less festive than usual as people take a red pen to their annual Christmas card list. This is a reduction in Christmas cheer. We mustn't forget how important a lifeline the postal system is for people,' said Ms Altmann. She said that rising stamp prices will particularly affect the elderly, who are less prone to communicate with friends and family via email. "It is easy to take instant communications for granted but many older people are reliant upon the postal system - particularly at Christmas - and value it highly,' said Ms Altmann. In April, Royal Mail increased the price of a first class stamp from 46 pence to 60 pence while second class stamps rose from 36 pence to 50 pence. lan Murray, the shadow postal affairs minister, said that the expected fall in card numbers is 'significant given that people over 50 are more likely to use traditional mail than younger age groups.

Case study Is demand slowing for Tesla's cars? New figures reveal rising stockpiles of vehicles as Elon Musk's car firm slashes prices Tesla made about 9,300 more vehicles than it delivered last year, raising concerns among industry analysts that inventory is growing as demand for the company's electric cars may be starting to wane. If demand falls, they say, the company will enter a new phase of its business. Like other automakers, Tesla will have to either cut production or reduce prices to raise sales. A drop in demand could also curtail the company's earnings and jeopardize CEO Elon Musk's promise to post sustained quarterly profits. WHAT ARE THE TAX CREDITS ON ELECTRIC CARS? Under a major tax overhaul passed by the Republican- controlled U.S. Congress late last year, tax credits that lower the cost of electric vehicles are available only for the first 200,000 such vehicles sold by an automaker. The tax credit is then reduced by 50 percent every six months until it phases out. On Wednesday, Tesla did cut prices, knocking $2,000 off each of its three models. The company said the cuts will help customers deal with the loss of a $7,500 federal tax credit, which was reduced to $3,750 this month for Tesla buyers and will gradually go to zero by the end of 2019. 'They have for a long time had more demand than supply: Gartner analyst Michael Ramsey said. 'It's becoming apparent that that dynamic is changing

Tesla reported that it produced 254,530 cars and SUVs last year and delivered 245,240. The company's deliveries for the full year matched Wall Street estimates, but its figures for the fourth quarter didn't reach expectations. Tesla said it delivered 90,700 vehicles from October through December Analysts polled by data provider FactSet expected 92,000. Jeff Schuster, a senior vice president at the forecasting firm LMC Automotive, said demand for Tesla's lower-priced Model 3 has been artificially high for the past six months as the company overcame production problems at its Fremont, California, factory. 'You've had these inflated months because of delayed deliveries' Schuster said. "We're probably getting to that point where we're getting to equilibrium and consumers aren't necessarily waiting for vehicles. Last year, Tesla reported that about 420,000 buyers had put down $1,000 deposits to join the Model 3 waiting list. LMC predicts that Tesla U.S. sales will rise in 2019 because it's the first full year on the market for the Model 3. It anticipates sales to then fall by about 10,000 in 2020. Losing the tax credit will hit those who have been holding out for the $35,000 version of the Model 3, Schuster said. At present, Tesla is selling only versions that cost at least $44,000. Under federal law, buyers get the full tax credit until a manufacturer reaches 200,000 in sales since the start of 2010.

Tesla hit 200,000 in July but the full credit continued for vehicles delivered by Dec. 31. It was cut in half on Jan. 1 and will go away by the end of the year. 'You've had your early adopters, those early followers have already come in' to buy, Schuster said. 'Now you're trying to appeal to the mainstream market. I think that will have an impact on overall demand! At the same time, inventory appears to be rising. The company parked hundreds of cars at lots and Tesla stores all over the country at the end of last year, which could indicate excess stock. Tesla wouldn't give inventory numbers but said it has lower stocks than its two biggest competitors, BMW and Mercedes. TESLA'S STOCKPILES The company parked hundreds of cars at lots and Tesla stores all over the country at the end of last year, which could indicate excess stock. Tesla wouldn't give inventory numbers but said it has lower stocks than its two biggest competitors, BMW and Mercedes The Associated Press found one lot on the north side of Chicago where Tesla was storing dozens of vehicles in late December, and Mark Spiegel, a hedge fund manager who bets against Tesla stock, said other lots were full across the country. Tesla said it sometimes stores vehicles on lots as they're being shipped to company dealerships across the nation. The lot in Chicago has fewer cars on it now, the company said.

"Our inventory levels remain the smallest in the automotive industry, the company said Wednesday. Tesla said it sometimes stores vehicles on lots as they're being shipped to company dealerships across the nation. The lot in Chicago has fewer cars on it now, the company said. Tesla also says Model 3 sales should grow worldwide as it expands distribution and begins to offer leases. Deliveries in Europe and China will start in February, and a right-hand- drive version is coming later in the year, the company said. In addition, inventory dropped in the fourth quarter as Tesla 'delivered a few thousand vehicles more than produced! Tesla said it had about 3,000 vehicles in transit to customers at year's end. But even with that number, Schuster said production still exceeded deliveries, which doesn't fit Tesla's business model of building cars when they are ordered by customers. Still, even at 9,300, Tesla's inventory is smaller than other automakers that have to stock dealerships, Schuster said.