Background:
Toyota is one of the world’s biggest manufacturers of motor vehicles. It has worldwide market spreading from Asia to North America, Europe and other parts of the world. Toyota has different designated models which are produced specifically for the country. Depending upon the market demand and supply conditions, Toyota keep on revising their prices.
The case:
Suppose demand and supply conditions of Toyota cars in year 2011 have been given below.
It has been observed that the sales of Indus Motor Company’s (IMC)
Toyota cars– the highest selling cars in the country – decreased 24% in
August 2012 to 2,800 units, from 3,060 units in August 2011. There are
many reasons of declining trend in the sale of Toyota cars. One of the
main reasons is that during the last six months almost 25,000
used vehicles have been imported, amounting to 25 per cent of the total
market demand for automobiles in the country and causing an annual loss
of sales revenue worth Rs.20 billion to the parts-manufacturing
industry. Another reason is that the Indus Motors was short-sighted in
making the necessary change to bring cars to match the Euro-II standards
and thusly, had to increase the prices overnight when the deadline of
July to swap to Euro-II standards had passed and companies hastily
switched over to the new Euro standards.
Requirement:
Part A:
Keeping in view the demand supply conditions of Toyota cars given in the table:
a. Calculate the point elasticity of demand and supply of Toyota cars from August-July 2011.
b. Calculate the Arc elasticity of demand and supply of Toyota cars from December-July 2011. Marks :( 5+5)
Part B:
a. Why the sales revenue of Toyota cars has decreased in 2012? Elaborate your answer by keeping in view the calculated answers in part A.
b. What will be the effect on the equilibrium situation of Toyota cars demand curve as Toyota did not converted their cars on Euro-II standards? Illustrate graphically by taking supposed equilibrium condition of Toyota cars.
c. As an Economic advisor, if you suggest Pakistan’s department of transportation to impose costly regulation on manufacturers of imported in order to facilitate domestic infant industry. What will be the impact of costly regulation on the equilibrium situation of Toyota cars? Illustrate graphically.
Marks :( 4+3+3)
Solution:
Answer Part 1
A) Calculate point elasticity quantity supplied :
point elasticity quantity supplied
ϵ = ΔQ/ΔP x P/Q
ϵ= 0.27/0.2 x 5/ 6.63
ϵ= 1.35 x 0.75
ϵ= 1.01
point elasticity quantity demanded
ϵ=ΔQ/ΔP x P/Q
ϵ=0.3/0.2 x 5/ 6.7
ϵ=1.5 x 0.74
ϵ=1.11
B) Calculate Arc elasticity:
ϵ= Q1 –Q2/ Q1+ Q2 % P1-P2/ P1+ P2
ϵ= 3.74-3.33/3.74+3.33 % 2.9-2.6/2.9+2.6
ϵ= 0.41/7.07 % 0.3 /5.5
ϵ= 0.41/7.07 x 5/0.3
ϵ= 2.05/2.12
ϵ= 0.96
Part 2;
A) The sales revenue of Toyota cars has decreased in 2012 because of two reasons the very basic reason is that during the last six months almost 25000 used vehicles have been imported amounting to 25% of the total market demanded for automobiles
The second reason is that the Indus motor is shot sighted in making the necessary changes to bring car to match the EuroӀӀ standard.
Toyota is one of the world’s biggest manufacturers of motor vehicles. It has worldwide market spreading from Asia to North America, Europe and other parts of the world. Toyota has different designated models which are produced specifically for the country. Depending upon the market demand and supply conditions, Toyota keep on revising their prices.
The case:
Suppose demand and supply conditions of Toyota cars in year 2011 have been given below.
| Month | Total Price | Total | Total |
| charged In | Quantity | Quantity | |
| ‘000000000 | sold In ‘000 | Demanded | |
| In ‘000 | |||
| July | 2.6 | 3.33 | 3.50 |
| August | 2.4 | 3.06 | 3.20 |
| September | 2.8 | 3.30 | 3.60 |
| October | 2.9 | 3.37 | 3.80 |
| November | 3.1 | 3.88 | 4.20 |
| December | 2.9 | 3.74 | 4.15 |
Requirement:
Part A:
Keeping in view the demand supply conditions of Toyota cars given in the table:
a. Calculate the point elasticity of demand and supply of Toyota cars from August-July 2011.
b. Calculate the Arc elasticity of demand and supply of Toyota cars from December-July 2011. Marks :( 5+5)
Part B:
a. Why the sales revenue of Toyota cars has decreased in 2012? Elaborate your answer by keeping in view the calculated answers in part A.
b. What will be the effect on the equilibrium situation of Toyota cars demand curve as Toyota did not converted their cars on Euro-II standards? Illustrate graphically by taking supposed equilibrium condition of Toyota cars.
c. As an Economic advisor, if you suggest Pakistan’s department of transportation to impose costly regulation on manufacturers of imported in order to facilitate domestic infant industry. What will be the impact of costly regulation on the equilibrium situation of Toyota cars? Illustrate graphically.
Marks :( 4+3+3)
Solution:
Answer Part 1
A) Calculate point elasticity quantity supplied :
point elasticity quantity supplied
ϵ = ΔQ/ΔP x P/Q
ϵ= 0.27/0.2 x 5/ 6.63
ϵ= 1.35 x 0.75
ϵ= 1.01
point elasticity quantity demanded
ϵ=ΔQ/ΔP x P/Q
ϵ=0.3/0.2 x 5/ 6.7
ϵ=1.5 x 0.74
ϵ=1.11
B) Calculate Arc elasticity:
ϵ= Q1 –Q2/ Q1+ Q2 % P1-P2/ P1+ P2
ϵ= 3.74-3.33/3.74+3.33 % 2.9-2.6/2.9+2.6
ϵ= 0.41/7.07 % 0.3 /5.5
ϵ= 0.41/7.07 x 5/0.3
ϵ= 2.05/2.12
ϵ= 0.96
Part 2;
A) The sales revenue of Toyota cars has decreased in 2012 because of two reasons the very basic reason is that during the last six months almost 25000 used vehicles have been imported amounting to 25% of the total market demanded for automobiles
The second reason is that the Indus motor is shot sighted in making the necessary changes to bring car to match the EuroӀӀ standard.
