Thursday, August 31, 2006

Example of Supply and Demand at work

The first graph we are learning in Intro to Micro is the well known Supply and Demand graph. Although some students may think this graph is a pure abstraction with no relevant applications, an article in the WSJ that came out today suggests otherwise.

http://online.wsj.com/article/SB115698145559550022.html?mod=pj_main_hs_coll

Note when reading this: Basic theory says that if suppliers face an inventory buildup they will cut prices. This is because when inventories are increasing it suggests that the price level is too high relevant to how much the company is producing. Therefore, if the company wants to sell all of its product that is already produced, it must cut the price level. A lower price level would then be an incentive for the firm to cut back on production of this item in the future. Now read this:

"Domestic car makers need to boost their sales efforts to get rid of 2006 inventory. In the most recent data for this summer covering the period of Aug. 1 to Aug. 20, it took GM an average of 84 days to sell a car, while Ford took 83 days and the Chrysler Group trailed with 90 days, according to the Power Information Network. In contrast, it took Toyota 26 days to sell a vehicle while it took Honda Motor Co. 37 days. The industry average was 64 days. High gas prices have favored the Asian auto makers as they are perceived to have more-fuel-efficient vehicles."

1 comment:

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