1st Concept (demand, supply, market equilibrium)
First of all, the definition of supply is the quantity of goods a firm willing to produce or offer for sale at a certain price. On the other hand, demand means the desire and ability to purchase certain things at a certain price. In this case, if the demand or supply of a product changes due to the changes of price of the product itself, it is considered as changes in quantity demanded or quantity supplied. If the demand or supply changes due to other factors such as prices of substitute goods, technology advancement and level of income. It is call as changes in demand or supplied. Market equilibrium is where the quantity demanded and quantity supplied are the same (Economicshelp.org, 2015). For example, the consumer willing to buy at a price and quantity which is same with the firm willing to sell.
Back to the issue, according to the law of demand, there is an inverse relationship between quantity demanded of any good and the price changed. For example, if the price of a good falls, the quantity demanded of the good will rise. In this case, the price of Lexus’s vehicle increase, so that we could foresee the quantity demanded for Lexus’s vehicle decrease. To proof it right, we could explain it by using income effect. Price increase leads to decreasing in consumers’ purchasing power. Consumers will make a choice of choosing the substitute products which is produce by the competitor’s brands.
In this article, the drop of currency leads to increase in cost of production. Therefore, the price of Lexus’s vehicles increases. The increasing of price would automatically leads to decrease in quantity demanded. It also creates a market surplus. As shown in the graph above, to eliminate the market surplus, UMW Toyota Motor needs to decrease the quantity supplied of Lexus’s vehicles (S0 to S1).
2nd Concept (Elasticity of demand/ supply)
In economics term, elasticity of demand refers to the sensitiveness of demand for a good due to changes in economic variables (Investopedia, 2010). Elasticity of demand measures how much the quantity demanded will change when another factor changes. For example, price elasticity of demand. This measures the responsiveness of the quantity demanded changes when the price changes. To maximize profit, this is important for a firm to understand to set the prices of their products.
To calculate the price elasticity of demand, we can use the formula of “percentage changes in quantity demanded of the goods divided by the percentage changes of the price of the good”. When the price elasticity is elastic, it is larger than 1. When the price elasticity of demand is elastic, firms should lower the price for maximizing profit purposes. When the price elasticity of demand is inelastic, it will be less than 1. The firm should increase the price, because there will only be small amount of decrease in quantity demanded and again, the total revenue will increase. If price elasticity of demand is unit elastic, it will be equal to 1. In this case, there is no need for firms to change the price because changing the price of the good will not affects the total revenue.
From the situation in the article, we can see that the price elasticity of demand for Lexus’s vehicles is elastic. This can be explained by using the determinants of elasticity such as degree of necessities, level of income, availability of substitutes and price of the product itself. Lexus is a luxury brand, luxury goods tend to have a more sensitive responds from the consumer. People are more price sensitives to luxury goods simply because they are not necessities. People can still live without driving a Lexus. Secondly, the level of income is one of the reasons that affect the sales of Lexus vehicles. People with higher income tend to be more inelastic in demand than people with lower income. Most consumers who own a Lexus are high income level. Low income consumers could not afford luxury cars, they will prefer normal cars. Next, substitute products are threats for Lexus. The more substitutes the product has, the more elastic the demand is. Lexus has a huge amount of substitute competitors such as BMW, Mercedes and Audi. If the prices of the substitute goods decrease, the demand for Lexus will decrease. Last but not least, price of the product itself also causes the product to be elastic. The more expensive the product is, the more elastic in demand it will be. Lexus vehicle are expensive compared to Proton, Perodua and Honda. Therefore, Lexus is more elastic in demand. In short, from the graph above we can see that there is revenue lost due to increase in price of Lexus.
3rd Concept (Market structure)
A market includes few types of market structure. Monopoly, oligopoly, perfect competition and monopolistic competition. In monopoly structure, market was dominated by only one firm solely. For example, TNB and Astro. There are barriers to entry into the market. Firms could earn supernormal profit. In oligopoly market structure, few firm dominate an industry. For example, Maxis and Pepsi. It is difficult to enter the industry due to high barriers of entry. For perfect competition, there are a lot of firms selling similar products such as mineral water. Firm has freedom to entry the industry and earn only normal profit. In the monopolistic competition market structure, there is freedom of entry and exit (Economicshelp.org, 2015).
In this article we talk about Lexus, automobile industries are operating in the monopolistic competition market structure. Monopolistic competition is a market structure in which barriers of entry are low. There are many firms and buyers in the market. Each firms hold small market share. Therefore, each firm has little market share. Firms are competing by selling similar products. Industry in monopolistic competition has many close substitute. For example, all companies are selling cars. However, there are slightly different in each and every cars such as technology, quality, engines and the layout of the car. Brands such as BMW, Mercedes, Audi and others are considered as competitors for Lexus. There are many competitors in the market. Competitors in the market are trying to be outstanding among one another by improving the technology of the vehicles or decrease the price of vehicles to compete with the other brands. Lexus strongly focuses on their customer service and the after sale service, this is also one of the benefit which attract buyers. In monopolistic competition, firms are encouraged to advertise their products to promote the differentiation of their products due to all products are similar. In this case, Lexus has done a good job. Lexus’s advertisement can be seen in many platform such as highway billboards, television and radio.