Economi Portfolio Essay

Price ginger snap of demand (PED ) is the measure of the responsiveness of the demand for a certain not bad(predicate) to a change in the cost of this good. It is a measure of how consumers play off to a change in price.The formula used to calculate the price elasticity of demand for a given product is % change in quantity demanded of good APED =% change in prices of good AFigure 1 demandVW on Monday revealed salary income of 4.7bn ($6bn) last family, 14 per cent higher than in 2007, while sales increased 4.5 per cent to 114bn as VW sold 6.3m vehicles.This situation is shown in class 1. There was a shift in demand curve to the right, from D1 to D2, as sales increased. VW sales increased from Q1 to Q2, and they could set higher price for their cars, which increased from p1 to p2.Car commercialise is a type of a monopolistic all in ally warlike market. Monopolistic competition has deuce basic assumptions. Firstly, the producers havent much impact on form of control over pr ice. It means that they have to keep low prices for cars, because the stigma is very competitive. Secondly, there are many producers and many consumers, while no business has total control over the market price.Moreover, it is assumed that all firms are remuneration-maximizers, and the same is with Volkswagen. It go out not be concerned rough revenue maximization or sales maximization, but only dough maximization. The number of workers it employs is also not important, nor environmental aims which are crucial these days. well-nigh of the firms are not concerned about the environment, and this is why there is forbid externality of consumption and production of VW cars. Manufactures give away greenhouse gasses and consumers cars also emit greenhouse gasses. However, Volkswagen wants only to maximize its profit.As car market is monopolistically competitive market, introduce 2 willing best represents VW costs and revenues. VW on Monday revealed net income of 4.7bn ($6bn) last year, so there was perverted profit which is label as pink area on the figure 2. The abnormal profit is the total revenue minus total cost at the train of output where MC curve is equal to MR curve.Figure 2 abnormal profitFigure 3. lossesIt is said in the article that this year earnings will not reach the high levels of previous years.. It whitethorn be possible that VW will accept only losses, which is shown in figure 3. Again, the total abnormal profit or loss is between the AC curve and AR curve at the level of output where net income are maximized (Q). The loss of Volkswagen is marked as the red rectangle in figure 3.VW has many ways to increase demand for their cars. First of all, they should spend much money on innovation, because consumers can be attracted by VW cars with the newest technology. VW works in monopolistic competition and it can steal consumers from other car makers, who will prefer Volkswagen cars.There are three possibilities of what VW may do. Volkswag en should shut land in the short run if it is unable to cover all its shifting costs in the short run. This level of price is knows as shut-down price. Secondly, it may operate in the short run, when it is able to cover all its variable quantity costs in the short run. This is known as break-even price and VW will operate in the short run so that it can make an abnormal profit in the long run. Finally, Volkswagen may operate at the profit-maximising level of output if it wants to make abnormal profit in the short run.