PART
1. (Summary of article)
Article can be viewed by clicking the following link:
Article can be viewed by clicking the following link:
On
September 2015, the famous German car manufacturer, Volkswagen, was involved in
a scandal where the Volkswagen diesel fueled cars sold had their device
modified to fake emissions from engine to be more environmental friendly. When
this trickery was exposed, it caused an uproar of the car owners and also the
environmental authorities. A total number of 11 million cars were recalled
immediately across worldwide. Thorough investigations are now being conducted
by the authorities in the affected countries. The scandal affected Europe the
most as the countries in the continent have their diesel price subsidized,
which makes diesel fueled cars more popular than the usual car that runs on
petrol, resulted in a high demand of diesel cars in the European market. This
scandal also branched out to health issues as deceptive emissions can cause
pollution and thus affects an individual’s health. This article is related to
economics because it heavily involves the production and consumption of goods.
As a manufacturer, Volkswagen manufactured faulty cars and it critically
affected the consumers. This scandal also affects the overall car market as
being an influential company, Volkswagen may suffer huge losses from it,
altering the car market and giving an edge to the competitors.
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| Source: Townhall |
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| Source: Edmonton Journal |
PART 2: (Relating economic concepts to the article).
The
first economic concept that relates to the article chosen is the demand concept. Demand is defined by the quantity of
goods consumers are prepared to purchase. (What Is Economics?, 2015). The
demand theory heavily relates to the article as the scandal might cause a fall
in demand for Volkswagen cars as people who heard about the scandal can never
really trust that the manufacturer will not repeat the same trickery again. One
of the factors that could affect the demand in Volkswagen diesel cars is the preferences
of consumers. Consumers’ preferences are important
aspects that impact consumers’ decision to purchase a particular product or pay
for a certain service (Brumfield, Adelaja & Lininger 1993). For example,
consumers who are aware of the scandal will change their preferences towards
Volkswagen. They might turn to other car manufacturers if they desire to
purchase diesel cars instead.
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| Source: Office Chum |
Another
factor that might affect the demand in Volkswagen cars is the availability of
substitute services or products. Substitute
goods are goods which can be utilized in place of one other for satisfactory of
a specific need. For example, margarine and butter can be categorised under
substitute goods. (Chand, 2013). In this case, there are other car
manufacturers that sell diesel cars worldwide besides Volkswagen. Even if
consumers decide not to purchase Volkswagen diesel cars after the scandal, they
can still turn to other car brands if they wish to buy diesel cars. The other
diesel cars may differ from Volkswagen, but ultimately, they serve for the same
purpose. In summary, the quantity demanded for Volkswagen diesel fuelled cars
will fall even if the price is constant because of there are other substitute existing
in the market.
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| Source: Jantoo |
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| Source: Cartoonstock |
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| Source: Econs sg |
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An inside joke ( Elastigirl from The Incredibles)
Source:Slashfilm
The third economic concept that relates to the article chosen
is market structure. Market structure is usually
explained as the other characteristics, traits and organisation of a market
(Riley, 2015). The four main and focused market structures are perfect
competition, monopoly, oligopoly, and monopolistic competition. But in this
case, it is identified that Volkswagen, as a car manufacturer, falls under
perfect competition. A market of perfect competition is as such when it
has many sellers and buyers, when there are other firms selling similar goods,
and there are no barriers to entry for new firms that wishes to enter the
market (Microeconomics, 2008). It is said that these firms puts out products
that are homogenous. These firms are assumed to be price takers as well
(Microeconomics, 2008). Boundless, 2015 defines that a firm is a price taker
when they alter the rate of production and sales and the changes will have no
effect towards the entire market price of the certain product, and therefore,
has no control over the market and has to accept whatever that happens to the
market price.
As mentioned, Volkswagen falls under perfect competition
because the car market, or diesel car market is wide because there are a lot of
other car manufacturers worldwide that produce cars with similar utility as
well. Being one of the world renowned
car brands, Volkswagen indeed has many buyers spanned across the globe as well.
As for barriers to entry, it is easy for new firms that wishes to enter the
market because there are no restrictions. This is heavily related to Volkswagen
as it was once a new firm. Volkswagen was founded in 1937 by the government of
Germany (History, 2009). And since Volkswagen is a perfectly competitive firm,
Volkswagen is a price taker, which means to say that the market price for
diesel fuelled cars or other types of cars will not be affected by the change
of price and situation in Volkswagen.
PART 3: Explanation with diagram
Figure 1 shows a standard demand curve. Now, the issue that Volkswagen is currently facing is the recalling of a total number of 11million cars worldwide for inspection. Based on what was mentioned in Part 2, consumers’ preference and taste heavily affects the demand for Volkswagen diesel fuelled cars in the future because it is likely to change for the worst. According to (Lipsey, Ragan & Storer 2008), a change is preferences that does not favour a product will cause a shift of demand curve to the left, while the constant variable is the price. In this case, there was no price change for made by Volkswagen, it was the change of preferences of consumers that caused the fall in demand and therefore, there is a shifting to the left by the demand curve from D0 to D1.
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Figure 2 shows a demand curve for products or services that
have an elastic demand. As stated in part 2, Volkswagen’s diesel fuelled cars
is elastic. Figure 2 is an elastic demand curve that shows the equilibrium, E0,
and the shift in supply curve from S0 to S1. The demand curve shows that the
impact of reducing supply will cause a slight rise in price and a large
decrease of quantity. This indicates that if Volkswagen choose to reduce the
supply of diesel cars, the price of will rise and the quantity of diesel cars
will decrease drastically. It can also be concluded that the demand curve in
Figure 2 shows more response towards price changes. In summary, there will be a
lot of responses or feedbacks from consumers worldwide towards Volkswagen if
they ever choose to set a change in their car prices.
