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MPME7113

Managerial Economics

August 2023

INSTRUCTIONS:

Read the case study below and answer all questions.

CASE STUDY GUIDELINES

1. Unstructured one-line answer is to be avoided at all cost. You should try to structure according to SECTIONS AND SUBSECTIONS to provide the story line for your answer. Please highlight the important points as necessary.

2. The answer must be from the case study only. Understanding the case study is crucial for your answer. All examples and justifications must be from the given case only.

3. In relation to the case study, you need to identify concepts/theories learned from the course which are relevant to the identified problem. Hence, there is no simple right or wrong answer. Your argument and justifications will determine the quality of your answer.

4. Always try to define important concepts in any given questions so that your answer will be in the scope of the context in which the case study is referred.

5. Provide answers to the problem by associating with the concepts/theories and within the contextual materials the problems are set. Only specific answer pertaining to the case will be entertained. Answer outside the context of the case is not acceptable.

6. Students are expected to come up with their own original thoughts in responding to the questions.

7. Word for word copying from unacknowledged source is considered as PLAGIARISM and will end up for 0 mark. You must use APA version 7 for citations and referencing. This will enhance the quality of your answer.

Using an Income Threshold model in China

According to an income threshold model, no one who has an income level below a particular threshold buys a particular consumer durable, such as a refrigerator or car. The theory also holds that almost everyone whose income is above that threshold buys the product.

If this theory is correct, we predict that, as most people's incomes rise above the threshold in emergent economies, consumer durable purchases will increase from near zero to large numbers virtually overnight. This prediction is consistent with evidence from Malaysia, where the income threshold for buying a car is about $4,000.

In China, incomes have risen rapidly and now exceed the threshold levels for many types of durable goods. As a result, many experts correctly predicted that the greatest consumer durable goods sales boom in history would take place there. Anticipating this boom, many companies have greatly increased their investments in durable goods manufacturing plants in China. Annual foreign direct investments have gone from $916 million a year in 1983 to $116 billion in 2011. In expectation of this growth potential, even traditional political opponents of the People's Republic—Taiwan, South Korea, and Russia—are investing in China.

One of the most desirable durable goods is a car. Li Rifu, a 46-year-old Chinese farmer and watch repairman, thought that buying a car would improve the odds that his 22- and 24-year-old sons would find girlfriends, marry, and produce grandchildren. Soon after Mr. Li purchased his Geely King Kong for the equivalent of $9,000, both sons met girlfriends, and his older son got married. Four-fifths of all new cars sold in China are bought by first-time customers. An influx of first-time buyers was responsible for China's ninefold increase in car sales from 2000 to 2009. By 2010, China became the second largest producer of automobiles in the world, trailing only Germany. In addition, foreign automobile companies built Chinese plants. For example, Ford invested $600 million in its Chongqing factory in 2012.

Source: Jeffrey M. Perloff and James A. Brander (2020) Managerial economics and strategy, pp. 4    

Question 1

A model is a simplification of reality. The objective in building a model is to include the essential issues, while leaving aside the many complications that might distract us or disguise those essential elements. Discuss the role of economic model in Managerial Economics. What are the factors a company should consider in order to decide to invest in China using an Income Threshold model.      (Total marks = 25)

ANSWER

Thoughtful representations of genuine occurrences aim to catch vital components and relationships while disregarding less applicable specifics. In business economics, models offer an organized frame for choice by aiding administrators understand difficult monetary marvels and settle on educated decisions. In utilizing a pay edge model for speculation choices in China, organizations should consider different elements. In administration focused around business, models give a sorted out system for choice by helping directors comprehend convoluted monetary wonders and make educated decisions. In utilizing an income limit model for speculation choices in China, organizations ought to consider different components.

A revenue Benchmark style, as shown in the case, can help businesses in foreseeing consumer conduct supported revenue ranges. Such styles simplify the choice creating procedure by emphasizing on an essential factor, whether a person's gains surpass a special benchmark—resulting in the purchase of durable products. This streamlined approach permits directors to gauge market potential, allocate assets successfully, and modify strategies correspondingly.

When considering investment in China using the Income Threshold model, several factors should be weighed.

Income Distribution and Growth: Firms ought to examine China's income allocation and also the direction of income development. Quickly climbing incomes, as noticed within the situation, may signify a possible rise in purchaser call for sturdy items.

Threshold Appropriateness: Ascertaining whether the prearranged income limit adequately reflects the procurement behaviors within the Chinese economy is important. Adjustments could be necessary based on cultural, commercial, and regional varieties.

Market Demand: Assessing how far incomes have risen past the point for various consumer products offers views into demand for exact products, helping corporations to aim at the most promising areas.

Competitive Landscape: A comprehension of the competitive setting and promote fullness helps in approximating the possible for development. Early access can be useful; however extreme rivalry could necessitate set apart procedures.

Investment Risks: Organizations should regard political, fiscal, and administrative threats linked with investing in an unfamiliar marketplace. Governmental policies, trade interactions, and possible currency variations necessitate attentive examination.

Infrastructure and Distribution: Appropriate distribution systems and supporting infrastructure are necessary for effective market invasion. The accessibility of required assets, supply chains, and logistics ought to be thought about.

Question 2

“Four-fifths of all new cars sold in China are bought by first-time customers. An influx of first-time buyers was responsible for China's ninefold increase in car sales from 2000 to 2009. By 2010, China became the second largest producer of automobiles in the world, trailing only Germany.”

Discuss at least four (4) types of demand determinants for car in China in a normal market environment that is commonly practiced. Justify your answer.                              (Total marks = 25)

ANSWER

In a typical market setting, numerous desire determinants have an effect on automobile buys in China. These elements together contribute to the rise in automobile product sales and the expansion of China's automobile business, as highlighted in the case study. Four kinds of desire determinants are as follows:

Income Levels: Rising incomes play a pivotal role in driving car demand. As incomes increase, more individuals cross the income threshold required to afford a car. In the Chinese context, the rapid economic growth and increasing disposable incomes have propelled a significant portion of the population into the bracket where car ownership becomes feasible.

Population Growth and Urbanization: The amount and urbanization of an inhabitants affect automobile request. China's huge inhabitants and continuous urbanization have caused elevated require for personal transport. Persons relocating from rural parts to towns often discover cars essential for motion owing to minimal general public transit selections.

Consumer Preferences and Lifestyle: Shifting customer preferences for ease, standing, and life improvement too change motorcar request. Owning a motorcar is frequently seen as a mark of communal standing and a reflection of a bettered life. As yearnings change, many individuals opt for motorcar ownership, further driving request.

Infrastructure Development: Accessibility and characteristic of transportation framework, which includes avenues and interstates, influence automobile request. Betterment of framework not just makes automobile utilization conceivable yet additionally advances proprietorship. As China puts resources into broadening its street system and transportation offices, the advantage of having an auto grows.

The reason for these factors lies in the steady movements seen in the case research and broader monetary guidelines. The climb in earnings amounts in China has made automobile control available to a larger part of the residents, ensuing in increased sales. Additionally, China's resident growth and ongoing urbanization have led to higher request for individual transportation. The appeal of cars as a symbol of rank joins with changing purchaser choices, while improvements in infrastructure have made car ownership more useful and coveted.

Question 3

Discuss the factors that influence the price elasticity of demand for a car in China. How these factors can affect the demand elasticity. Additionally, explain how a manager can leverage this understanding to make pricing and revenue optimization decisions.       (Total marks = 25)

ANSWER

The cost responsiveness of demand for cars in China is impacted by numerous things that decide how reactive shoppers are to cost variances for autos. These things, in turn, have an effect on the demand responsiveness:

Substitutability: Other options close to cars like trains or shared rides influence flexibility. If options that are nearby are simple to get, customers can simply move making wants more adaptable (responsive) to cost changes.

Necessity vs. Luxury: Automobiles may potentially be thought about either as requirements (e.g., for daily travel in regions with restricted community transit) or as extravagances (e.g., for prestige). Requirements tend to have inflexible demand, as purchasers are less likely to change their purchase behaviours in response to price alterations.

Proportion of Income: The share of a buyer's receipts spent on a vehicle impacts flexibility. If cars create a substantial share of income, buyers are likely to be more sensitive to price, resulting in more flexible demand.

Time Horizon: Demand flexibility can change over differing time spans. Within the short term, customers might not have choices simply accessible, resulting demand to be less flexible. Throughout the long term, consumers can modify their choices, making demand more flexible.

Understanding these factors, a manager can make pricing and revenue optimization decisions:

Promotions and Discounts: In areas where demand is elastic, offering lower prices or special offers can persuade customers to shift from alternatives. Administrators can benefit from this reaction to capture a bigger part of the market.

Segmentation: Getting the necessity-necessity range helps directors portion the market productively. Requirements could permit steady evaluating, while high-class parts might again price that are higher.

Long-Term Planning: Administrators comprehending the effect of period viewpoints, directors can anticipate displacements in extensibility. For instance, if a municipality is scheduling a big public transportation advancement, directors should get ready for enlarged request extensibility in the long term.

Income Sensitivity: Taking into account amounts earned and parts spent on vehicles assists administrators in modifying pricing policies for different income brackets, guaranteeing availability and market infiltration.

Understanding the factors determining elasticity of demand and how they interact with automobile pricing lets executives put into practice tactics that optimize earnings and good results. Adapting pricing policies in tune with the precise factors at work permits executives to reply suitably to market alterations and consumer conduct.

Question 4

“An influx of first-time buyers was responsible for China's ninefold increase in car sales from 2000 to 2009. By 2010, China became the second largest producer of automobiles in the world, trailing only Germany. In addition, foreign automobile companies built Chinese plants. For example, Ford invested $600 million in its Chongqing factory in 2012.” 

Discuss four (4) factors how can the information on GDP and employment be used by managers in China as far as managerial economics is concerned. Justify your answer.  (Total marks = 25)

ANSWER

Information about gross domestic product (complete home output) and labor works a essential role in directing administrative selections in China's commercial scene, notably in the context of administrative economics. Four central aspects highlight how administrators can utilize gross domestic product and labor data:

Market Potential and Consumer Confidence: Economic success and optimistic customers: Growth in total value of goods made and services offered indicates the overall financial wellbeing of a nation. Leaders can use climbing complete value stats to evaluate market chances, as rising complete value normally relates to greater consumer spending. Confident buyers are more likely to make buys, like vehicles, which can inform production and supply choices.

Demand Forecasting: Managers can examine the bond between GDP progression and automobile purchases. An economic system increasing normally signifies heightened obtainable income, feasible causing to higher automobile request. Understanding this connection helps in request estimating, letting chiefs to allocate assets correctly and optimize making agendas.

Investment and Expansion Decisions: Increased gross domestic product increases regularly signify an encouraging commercial environment. Leaders can translate vigorous economic results as an indication of security and likely profitability. The choice of international corporations similar to Ford to invest in Chinese factories indicates certainty in the market's extension outlooks and the aptitude to tap into the broadening customer foundation.

Labor Market Dynamics: Positions statistics impact work environment. Good positions rates indicate a rising workers body with purchasing capability. Management may analyze laborers supply, charges, and ability levels, serving choices on manufacturing scaling and resource reservation.

The coordination of these aspects with underlying guiding economic ideas for managers. The rise in gross domestic product straight influences customer actions, signaling possible sales quantity and income. The surge in automobile purchases and the founding of foreign factories in the course of China's financial growth show how managers made the most of this trend. Moreover, gross domestic product and job information offer insights into market balance and the workforce's dynamic style, the two critical considerations for investment and functional choices.

Placing gross domestic product and occupation facts into administrative economics helps administrators with a complete view of the economical scene, enabling them to predict demand, distribute resources properly, and strategically place their businesses for enlargement.