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  1. brand new car… got a He’s like a Looks Jaguar ...[Mercedes] It’s got leather seats… It’s CD PLAYER got a

  2. Group One presents…

  3. Jamie Kendig Jason Kutzavitch Eliseo RoquizEmily Sylanski A.J. Zubaty

  4. Jason Kutzavitch A.) Introduction B.) Factors of Demand • Eliseo Roquiz A.) Elasticity B.) Factors of Supply • Emily Sylanski A.) Price Discrimination B.) Advertising Table of Contents

  5. A.J. Zubaty A.) Perfect Competition B.) Diseconomies of Scale • Jamie KendigA.) Factors of Production B.) Opportunity Cost C.) Conclusion Table of Contents (Continued)

  6. Introduction • Background • Founded in 1886 by Gottlieb Daimler and Karl Benz • Division of Daimler and Chrysler • Maker of fine luxury cars • Germany-based company • Cars known for their safety, quality, comfort, longevity, innovation, and value retention • In 2001 they sold 206,638 vehicles • We will apply the principles that we’ve learned in Microeconomics to this successful automobile manufacturer.

  7. Ceteris Paribus Factors of Demand • Income • Normal goods • Inferior goods • Price of Related Goods • Substitutes • Complements • Tastes • Expectations of Consumers • Income • Prices • Quantity • Number of Buyers

  8. Income • Normal Goods – as income increases this results in an increase in demand for the good, and as income decreases this results in a decrease in the demand for a good. • Examples: Mercedes Benz, BMW, Audi CL 600 Coupe MSRP $125,564.00

  9. Income (cont.) • Inferior Goods – as income increases this results in a decrease in the demand for the good, and as income decreases this results in an increase in the demand for the good. • Example: Daewoo Lanos 3-Door MSRP $9,199.00

  10. Income (cont.) • As income changes the entire demand curve shifts Increase in Demand Price Decrease In Demand D1 D2 D0 Quantity

  11. Price of Related Goods • Substitutes – as the price of a substitute increases this results in an increase in demand for our goods, and as the price of a substitute decreases this results in a decrease in demand for our good. • Example: • Mercedes Benz vs. BMW • Mercedes Benz vs. Ford/GM • Mercedes Benz vs. Toyota

  12. Price of Related Goods • Complements: • INCREASE in price  DECREASEin demand for the good • DECREASE in price  INCREASE in demand for the good • Example: • Mercedes Benz vehicles vs. parts • If parts cost less more people will buy them to repair their cars rather than buy a new one.

  13. P 1.) Initial demand for vehicles D0 Q P 3.) Demand for vehicles after price of fuel pumps go down. D1 D0 Q Price of Related Goods (con’t.) 3 steps on demand for vehicles w/ a complement involved: 2.) Price of a fuel pump goes up from $150 to $500.

  14. Taste • As something becomes more fashionable, then the demand curve will shift to the right and vice versa. • Sport Utility Vehicles (SUV) – have become very popular in the past few years.

  15. 2003 ML500 Light Truck Taste (cont.) • Demand for SUV’s in the last few years: Market Share Among Top Vehicles Segments 1996 = 14.2% 1999 = 19.9% 1997 = 17.0% 2000 = 21.0% 1998 = 18.8% SOURCE: Polk Price D1 D0 Quantity

  16. C230 Kompressor Sports Coupe MSRP $25,615.00 Minimal Income MedianIncome CLK320 Coupe MSRP $44,565.00 ExcessiveIncome CL55 AMG MSRP $115,265.00 Expectations of consumers • Income and Prices • Mercedes Benz produces many vehicles with a diversity of prices that are available to customers with various incomes:

  17. Sales of Mercedes Benz Automobiles in the United States, 1992 to 2001 Expectations of consumers (cont.) • Quantity • As more consumers enter the market the demand curve will shift to the right and as consumers leave the market the demand curve will shift to the left. • As more consumers entered the market sales went up.

  18. Number of Buyers • An increase in the number of buyers will increase demand and shift the demand curve rightward • A decrease in the number of buyers will decrease demand and shift the demand curve leftward Increase in Demand Price Decrease In Demand D1 D2 D0 Quantity

  19. Elasticity E= ∞ Perfectly Elastic E> 1 Relatively Elastic E= 1 Unitarily Elastic E< 1 Relatively Inelastic E= 0 Perfectly Inelastic RECALL: Q/Q P/P Elasticity = -2.456 Why? Consumer Demand in the United Statres: Analyses and Projections, H.S. Hauthakker, L.D. Taylor. 2nd Ed., Harvard Press. (263).

  20. Elasticity continued All 3Estimates of Elasticity of Demand apply to Mercedes: • High number and closeness of substitutes Lexus, BMW, Infinite • Large fraction of the budget $25,610 - $125,565 • Time period Long-run elasticity • Mercedes has an elastic price elasticity of demand

  21. Factors of Supply • Input Prices • Number of Sellers • Expectations • Price of alternatives • Technology

  22. Input Prices • Input prices may include labor wages, resource prices, etc. • A decrease in input prices will increase supply • An increase in input prices will decrease supply S2 S0 S1 Price Quantity

  23. Number of Sellers • Mercedes has 310 Independently Owned U.S. Dealerships • An increase in the number of dealerships will increase supply and shift the supply curve to the right • A decrease in the number of dealerships will decrease supply and shift the supply curve to the left S0 S1 S2 Price Quantity

  24. Expectations • A rise in the expected price of a good will decrease supply, shifting the supply curve leftward • A drop in the expected price of a good will increase supply, shifting the supply curve rightward • Example: • Mercedes will produce more output of a car in the future given that the car is a success

  25. Price of Alternative Goods • Example: Sedans and SUVs • The decrease in the price of an alternative good will increasethe supply of the good • The increase in the price of an alternative good will decrease the supply of the good S2 S0 S1 Price Quantity

  26. Technology • Technology may include their “state of the art” factories and machinery • Changes in technology will increasesupply and shift the supply curve to the right S0 S1 Price Quantity

  27. Price Discrimination • Charging different prices to different customers for reasons other than differences in cost. • Price Discrimination also might be used as a predatory pricing tactic by setting prices below cost to certain customers to harm competition at the supplier’s level.

  28. Requirements For Price Discrimination 1.There must be a downward-sloping demand curve for the firms output.ex. Mercedes Benz has a typical market demand curve. 2. The firm must be able to identify consumers willing to pay more. ex. Mercedes makes high price cars for high income people

  29. Requirements for price discrimination (cont.) 3.) The Firm must be able to prevent low-price customers from reselling to high price customers.ex. Contract agreements will prevent resale with the dealerships

  30. Price Discrimination Example 2003 E320 Sedan*all options the same $47,615.00at John Sisson Motors -VS-$45,545.00at Bud Smail Motorcars Limited

  31. Price Discrimination (cont.) • Price Difference of $2,310.00 • Why? • Location • Bud Smail Motorcars is located in Greene county a much less populated area with a less demand for the Mercedes Benz as compared to John Sisson Motors which is located in a much more populated area- Washington County.

  32. Advertising • One way to differentiate your product from others. • Advertising goals • Promotes efficient resource allocation- allows company to grow larger and more efficient. • Promotes Competition- this allows people to have choice and to alternate between dealerships. • Persuades people with catchy phrases and silly anecdotes. • Informs people of the choice they will make with there purchase.

  33. Advertising Techniques 1. Commercials ex. “3 Wishes” 2. Magazines ex. Motor Trend 3. Billboards ex. Llamar advertising 4.Internet ex.

  34. Diseconomies of Scale • Distribution • 310 Dealers in U.S. • Management • Regional Offices 1.) New York 2.) Washington, D.C., 3.) Chicago 4.) San Franciso 5.) Los Angeles 6.) Jacksonville

  35. Perfectly Competitive Market Large number of buyer and sellers. 1,600 Mercedes Benz dealers located worldwide Mercedes Benz sold over 206,633 vehicles in 2001. Homogenous Products Vehicles Produced (Cars, Trucks, SUVS) Many people consider vehicles to be the same. They do not differentiate between vehicles made by Ford or General Motors. The exception to this would be cars that are built for superior safety and styling, example would be Bentley.

  36. Perfectly Competitive Market (cont.) Easy entrance and exit No barriers to entry Companies are free to enter and long as they produce a product that consumers will purchase. Examples: Kia (1994) Daewoo (1998) No barriers to exit Companies that do not produce to where MR=MC will not last in the market Example: Delorean Motor Company(1986) Kia Rio Daewoo Lanos

  37. Perfectly Competitive Market (cont.) Perfect Knowledge Buyers and sellers have the same knowledge. With information available in magazines such as MotorTrend and on the Internet, there is no reason that buyers and sellers should not be aware of prices.

  38. Factors of Production Entrepreneurial Activity • Land • Labor • Capitol

  39. Land The physical space on which production takes place, as well as the natural resources found under it Land occupied all over the world by factories, sales and service outlets 50 world-wide production plants 6,300 world-wide full service and sale outlets for passenger and commercial vehicles

  40. Land (continued) Each dot on the map represents a major manufacturing facility owned by Daimler Chrysler in the world.

  41. Labor The time human beings spend producing goods and services Mercedes currently employs more than 199,000 people in the company's vehicle section throughout the world General Laborers are found in DaimlerChrysler’s plants (engine, assembly, glass, axle and stamping) and parts distribution centers.

  42. Capital Long-lasting tools people use to produce goods and services Physical Capital – Buildings, machinery, and equipment 50 factories for production of passenger and commercial vehicles 6,300 service and dealer outlets around the world Mercedes factories are up to the 21st Century standards when it comes to machinery and production line equipment

  43. Capital (continued) Human Capital – the skills and training the workers possess Two classes of workers based on skills they possess General Laborers - found in plants (engine, assembly, glass, axle and stamping) and parts distribution centers Skilled Trades – include welders, pipe fitters, tool makers, and metal cutters, etc.

  44. Capital (continued) Human capital also includes automobile engineers and designers.

  45. Entrepreneurial Activity Satisfies an unsatisfied want or desire These wants are satisfied in the following way: New vehicle concepts Ways for vehicles to be more fuel efficient and safer for customers Vehicles based on Internet multimedia that will allow customers to access information pertaining to the safety and maintenance of the vehicle

  46. Entrepreneurial Activity (cont.) Concept Cars: F 300 Life-Jet Fuel Efficient Cars: New Electric Car (NECAR) Fuel Cell Sprinter

  47. Opportunity Cost • Definition: The value of the best alternative that must be given up in order to get something • Mercedes must consider opportunity cost when making the decision to produce certain models of vehicles • Example: Mercedes choosing to allocate more resources in making the E320 Sedan rather than the M320 Light Truck

  48. Conclusion • Mercedes is a company to which we can apply the lessons we’ve learned in Microeconomics • By this, we are able to understand their decisions in production Questions?

  49. Thank you for you attention.