Microeconomics Individual Assignment

Microeconomics is the branch of economics. Microeconomics studies market behavior of individuals (consumers) and firms (producers) so that to understand the decision making process of households and firms. Next, microeconomics focuses more on the patterns of demand and supply, also the price determination in markets. (Investopedia, 2013)

Let’s take car as an example to study about demand and supply. Car has become one of the essential transportation for the people in Malaysia. There are more than three million cars in Selangor. (Motor Trader Editorial Team, 2012)

There are many imported cars in Malaysia. Toyota, Lexus, Subaru, Honda, and Hyundai are some famous brands of imported cars. In Malaysia, Toyota is considered as the most famous brand. Many Malaysians prefer Toyota as their first choice. 

• Demand

Demand is defined as a schedule that shows the amount of a product or service that consumers are willing to pay at each specific price in a set of prices, in a period of time. (Campbell, Stanley, 2005a)

Law of Demand 

-          Law of demand is consistence with common sense.

People do buy more a product or service at a low price than a high price.

There is always an inverse relationship between the price and the quantity demanded of a good or service during some period of time.

Basically, the demand of a product or service increases when the price falls.

Same, as price rises, the quantity demanded falls.

The graph shows the relationship of demand and the price. The demand graph is always down sloping, which means the price and quantity demanded are inversely related.

Toyota’s production and sales report

There is an article informed that there was a flood at Thailand on November 2011 (13takakuwat, 2011). The car factories had shut down and they could not produce and supply cars. Due to this situation, many car companies, including Toyota, could not fulfill the demand of the Malaysia’s market. As the demand of cars exceed the supply of the cars, the price of Toyota increased. Referring the latest Toyota annual report, the Consolidated Vehicle Production and Sales statistics show that from 2008 to 2012, Toyota sold the least cars, about 7,237 thousands cars in year 2010. The price of Toyota cars increased after the flood occurred. Hence, if the price increases, the demand will decrease.

Changes in demand

            













Demand will change based on the peoples, normally demand changed due to the price factor. Price varied wills influence the demand changes. In simple, the shift of the demand curve of a product or service, caused by new competition or shifting trends, which can either lower or raise the price. (Sloman, Wride, Garratt, 2012a)

There is complete shift of demand curve as a result of change in the factors other than price. A fall in demand leads to a downward shift of demand curve and a rise in demand cause the demand curve to shift upward. Some other determinants will also affect demand change. (Campbell, Stanley, 2005b)

Determinants that affect demand change

-Tastes

A favorable change in consumers taste for the product will makes the product more desirable, and consumers will prefer more the product. By means, consumers will demand more the product at each price. When the demand increases, the demand curve will shift rightward.

[Examples]

Malaysian prefer Toyota cars

According to a blog and an article, many Malaysians prefer to choose Toyota cars because of the brand. As Toyota has many years of experiences, people do believe that Toyota’s services and product quality is perfect enough. Besides that, some people state that Toyota’s more durable and reliable compared to other brands of imported cars. Next, there are also some people only love the name of Toyota. (Watts, 2012) Basically, Malaysia’s imported cars including Toyota, Honda, Hyundai, Lexus and others are almost have the same level of quality and their price range is not that far. From the blog, it seems to prove that people’s preferences can affect the sales of Toyota, in different reasons. (George, 2005)

-Price of related goods

• Substitutes

A substitute good can use to replace another good.

[Examples]

As mentioned above, Toyota has competitors in Malaysia. Take Honda as an example, Honda and Toyota have been two leading competitors for decades, in Malaysia. According to the article, it states that Honda and Toyota have price differences. For example, the base model 2002 Civic DX sedan launched by Honda and it has retail price of $13,800. 

Honda Civic Sedan 2002

 At the same time, Toyota also launched the Toyota Corolla CE sedan in 2002, but the price is slightly higher, which is $13,900 (Silbert, 2013). 

Toyota Corolla CE sedan  2002

Comparing two cars, they have same specifications. As the price gap is not that big, consumers has two choices if their budget is around 14 thousand to buy a car. For some consumers who prefer the lower price will definitely choose the Honda Civic DX sedan, it can be a substitute for Toyota Corolla CE sedan. If consumers tend to prefer more on Honda cars, the demand of Toyota cars will be affected.

• Complements

A complementary good is used together with another good.

[Examples]

The Malaysia online news stated that the government announced that the price of petrol and diesel would be increased of 10 sen a liter. (The Sun, 2010)

As petrol is a compliment good for cars. If government tends to increase the price of petrol, the demand of the Toyota petrol cars will decrease. Fortunately, Toyota has figured out a way to prevent the demand of Toyota cars continue to fall.

In year 2009, Toyota has introduced the new hybrid car, a gasoline engine run car with the power of electric motor, and it is suitable for petrol as fuel (Motor Trader, 2009) As Malaysians continue to demand Toyota cars, hybrid car will be under their consideration. The demand of hybrid car is estimated to increase significantly in the future.

• Supplies

Supply is a schedule that shows how many products or services would the producers willing to produce for a sale at each of a series of possible prices during a specific time. (Jackson, Mclver, 2005a)

Law of supply

Unlike law of demand, there are always a positive relationship that prevails between price and quantity supplied.

In simple, as price rises of products or services, the producers are willing to produce more of them.

As price falls, the quantity supplied falls.

 An increase in supply is shown as a rightward shift of the supply curve. In simple, the supply increases with the raise of price. They have positive relationship.

Changes in Supply

Same as changes in demand, there are also some determinants will affect supply. Costs are the major factor underlying supply curves (Jackson, Mclver, 2005b). In simple, anything that affects costs will shift the supply curve. There are two determinants will affect Toyota’s supply.

Determinants that affect supply change 

-          Resources Price/ Lack of resources

As the supply curve is based on production costs, the resources price will affect supply. A decrease in resources price will reduce the cost of production, and increase the supply of a product or service. Lastly, a firm is unable to produce goods if there is a lack of resources.

[Examples]

In year 2011, Japan experienced the largest earthquake. The earthquake is up to 8.9 magnitudes. The worst is, the earthquake has triggered a 30-foot tsunami (Dedman, 2011). That year, This Japan's economics moved to a downward trend, and many firms’ business were affected. Lately, the sales of Toyota in North America's sales had decreased 7.8% because Japan experienced shortage of Toyota cars, they could not supply cars to fulfill the demand of the market, due to the Japan Earthquake. As the resources were extremely limited that year and the individuals still demand more, the scarcity problem occurred. The scarcity of resources had caused Toyota not able to produce. At last, the supply of Toyota cars had reduced.

-Technology

Improvements in technology enable firms to produce more units of output, but with fewer resources. As the resources are costly, firms will try to use the resources as lesser as possible in order to save production cost, or improve development efficiency. (Sloman, Wride, Garratt, 2012b)

[Examples]

Toyota using technology to enhance supply chain

According to the latest annual report from Toyota, the company is trying to achieve a target of 30% improvement in development capacity and lower costs in development. The company will bring in new technology to improve all the factors that are involved in development. The development tools including human resources, designs, testing processes, and machines. These could influence Toyota to make huge improvements on development efficiency. Most important is, they are able to speed up the decision making process, which will stable supplies even emergency situations happen, and strengthen the supply chain.