First commentary article

This is the article that I am using for my first commentary

Germany's Car Industry Crashes

The article discusses the impact of the economic recession on the German car industry. It states that high gas prices in key markets and the decreasing buying power of consumers have caused car sales to slow. German car manufacturers, such as BMW, Mercedes Benz, Porsche and Volkswagen have to respond to the falling demand for cars by cutting jobs and shutting down factories.
Those of us who thought that the financial crisis wouldn’t have any impacts on the global economy were dead wrong. The German car industry is only one example which has to deal with the aftermath of the financial crisis. The industry analyst Ferdinand Dudenhoffer estimates that the number of new German cars delivered will shrink by at least 100.000 units to around 3.1 million in 2008 and will likely fall below 3 million next year. Now what exactly are the reasons for the falling demand for German cars? This can be explained by the Income Elasticity of Demand for German cars. Income Elasticity of Demand or YED measures the responsiveness of consumer’s demand for a good or service to a change in income. Goods that have a greater than proportionate increase in demand at a given change in income are said to be income elastic, whereas goods that have a smaller than proportionate increase in demand at a given change in income are said to be income inelastic. Applying this concept to the German car industry shows us that demand for German cars is income elastic.This finding isn’t really startling, since German cars are reckoned as “mobile billboards for excellence” and customers are willing to pay high prices for high-quality made in Germany. Thus, German cars are clearly normal goods for which demand increases when income increases and vice versa. As a result of the economic recession, most people’s income has decreased which therefore caused the demand for German cars to fall even more. However, the YED for German cars is not the only reason for a decrease in demand. Cars-Peter Forster, the president of GM in Europe, said at the Paris Motor Show that car sales were falling, because exploding gas prices from the year 2000 to 2008 have made the costs for car ownership prohibitive. Forster’s reasoning seems logical and can be backed up when looking at the determinants of demand for German cars. Gas is needed in order to drive a car and can thus be seen as a complement. One of the factors which causes demand for a particular good to shift is the price of its complements. The demand for a good and the price of its complement are inversely related, so when the price of a complement goes up, the demand for the particular good goes down and vice versa. For cars this means that as the price of gas goes up, the demand for cars goes down. The diagram below illustrates the falling demand for German cars.

The article mentions that German car manufacturers adjust to the falling demand by cutting back production. This means that they reduce the quantity supplied of cars in order to cut production costs and in order to restore the balance between quantitiy demanded and quantitiy supplied. The diagram below shows the interaction of supply and demand for German cars.

BMW for example announced that its plant in Leipzig will be closed for a week in October as well as the plant in Regensburg which will shut from November 3 to 7. This is only a quick fix. In the coming year, however, German car companies will have to cut up to 20.000 jobs, reckons Florian Dudenhoffer. The falling demand for German cars will have serious impact on the German employment market. The car industry is still Germany’s biggest employer, but in the long run, German car companies are likely to move more production out of Germany and closer to their customers in Russia, the U.S. or Asia. It is hard to say, whether this will be the right solution, since not even those places are safe from the economic crisis. Take Russia as an example, where more than 1 trillion dollars have been wiped off its share values during the crisis. The momentary situation becomes increasingly complicated and requires more than just an outsourcing of production in order to be solved. As Carl-Peter Forster demands, it is important for governments to take the initiative and stimulate the economy by offering credits and restoring consumer confidence. The German government should do the same and use money from the 500 billion rescue package in order to support its car industry and keep the successful tradition of cars made in Germany alive.

articles

Gold’s safe appeal attracts record interest

This article discusses the economic concept of demand in the gold market.

Another View: Governor's fun tax idea is not amusing

This article dicusses the economic concept of price elasticity of demand at the example of a tax on ticket sales to amusement parks.


Don't count on gas costs staying low

This article talks about the interaction of supply and demand to determine the pricing of oil

Losing its shine

Losing its shine

Why sales of luxury goods are slowing

Luxury- goods firms experience a decline in sales in Japan. After half a decade of stagnancy, sales have fallen dramatically in 2008 for most of the brands. LVMH for example, the biggest luxury-goods provider, experienced a drop in sales of 6% in the first six months and this year might be the first year in which its sales in the Japanese market decline.
This article is related to the economic concept of demand, because less demand in Japan is the reason why the sales of luxury products have fallen in 2008. Demand is defined as a schedule or a curve that shows the various amounts of a product that a consumer is willing and able to pay at each of a series of possible prices during a specified period of time. The article lists different factors that influence demand for luxury-goods in the Japanese market. The weak economy and the appreciation of the Euro against the Yen have caused demand to decrease. That’s because the buyers of luxury products in Japan who are mostly middle class people are more heavily affected by these economic trends than rich customers. Another reason for less demand for luxury-goods is the fact that Japan’s population is aging. Young singles are the main target group of luxury-product firms, because they are fashionable and willing to pay high prices for luxury goods. However, as Japan’s population ages, there are fewer buyers of luxury goods. So as this example shows, the size of a market is a very important determinant for the demand and due to the decrease in the number of consumers for luxury products, the demand has fallen as well. The article talks about another factor that has caused demand for luxury goods to fall. The article explains that over the years, consumers have developed a more sophisticated taste. As opposed to the days when huge amounts of money were paid for a big logo, buyers are now interested in the craftsmanship and the value for money. That’s why the demand for cheaper substitutes has increased as the example of “Coach”, a maker of more affordable handbags and accessories, illustrates. The example of “Coach” combines two factors, which can shift demand. Since the buyer’s taste has changed, companies which produce similar goods than LVMH have reacted and decided to make their goods more affordable. So the demand for products produced by LVMH has decreased, since competitors like “Coach” have lowered the prices of their products. This is called a direct relationship as the price of substitute B goes down and thus the demand for product A as well. The relationship between product A and substitute B is visualized by the following graph:

Due to less demand and the new consumers’ preferences, Louis Vuitton or Gucci have released less expensive collections. This move can be explained by a basic economic concept. By decreasing the prices of their products, Gucci and Louis Vuitton are hoping to attract more customers, thus to increase the quantity demanded for their products. This idea represents the law of demand which says that as the price of a product is going down, the quantity demanded of that product is going up. Often, demand curves are used to illustrate the law of demand. That’s how a demand curve looks like:

As the down warding slope of the graph suggests, the price and the quantity demanded are inversely related. As one of them goes down, the other one goes up.
In my opinion, luxury brands like Louis Vuitton and Gucci are still relying on their outdated image and have not adopted the sense of competition. That’s what the situation in the Japanese market shows. While sales of luxury brands are decreasing, sales of cheaper competitors are rocketing high. Releasing less expensive collections can be a solution to stop the downfall, but in my eyes it is more important for luxury-goods companies to renew their image and become more innovative. However, the decrease in the sales of luxury-goods firms only refers to the Japanese market. This can mean two things for the future. Due to its huge volume (one quarter of global luxury goods sales), the Japanese luxury market can be an indicator for the development in the global luxury market. On the other hand, the situation in Japan can be regarded as an individual case, which doesn’t have further dramatic effect on other countries luxury goods markets. However, I think that if luxury-goods firms don’t change their marketing concepts, they will encounter similar problems not only in Japan.