Summary:
The chosen article is about Tesla, and it is about the move of the renowned electric car manufacturing company, Tesla. The company has been changing its strategy to shut its stores to make its Model 3 affordable. It has many stores and service centers, but; according to the article, the founder and CEO Elon Musk finds it challenging to lower the price from $42000. He set the target to make the price $35000 or 33000 pounds. The article has abundant information about the company that has 378 stores and service centers across the globe. The article has significance in terms of economic concepts because the actions of the company end a change in demand and supply of the end product (Vaughan, 2019).
The article has shed light on different aspects of the company as well. For instance, it discusses the financial position of the company. The company has hinted that it may lose money in the current quarter when the article is published. It is to remember the article was published in March 2019. Moreover, the article also compares the delivery of Tesla products with product delivery on Amazon. It states that buyers have to wait for more from Tesla than Amazon. The move would also affect the workforce because fewer employees would be needed after going online.
The article is focused on the online model of the company, but it has made a strong context as well. For making the context, it has informed that the share price of Tesla has fallen to $301.20. The Securities and Exchange Commission made the case against the company. The company had to pay $40 million in settlements. However, the move to go online completely would affect the price and demand of the product, irrespective of case, and fines. The company has focused on attracting more customers so that the product may be affordable for more segments in society. The case seems to be a good explanation of economic principles.
Introduction:
This essay analyses and discusses a problem faced by a renowned electric car maker, Tesla. The company has decided to shut its physical stores in a bid to go completely online. It would close the majority of its stores and service centers. The founder and CEO of the company have taken this decision because he was facing a problem. It was related to the demand for its products. The electric car industry has been facing increasing competition, and Tesla is unable to lower the price of its cars. The move has specifically targeted the price of Model 3 that would be available for only $35000. In response to the decrease in prices, the demand for the product would increase, and it would solve the problem faced by the company. The following analysis and discussion sections help understand the problem regarding economic principles. The analysis uses economic concepts to guide the company and take lessons from the case.
Analysis:
The analysis has used two different scenarios. It is to remember that both scenarios are related to each other. It is because the case is the same for both. In the first case, the supply cha demand curve has been presented. In the second diagram, the price and quantity demanded are the two items. The price is the dominant factor, so it would remain in both diagrams. The company has used a price strategy to increase the quantity demanded.
Supply and Demand of Model 3 after going online:
The article notes that the company is going to reduce the prices of its products. It would affect the supply and demand of Model 3. There would be an increase in demand, and to meet that demand, the company will have to increase supply. It is the result of the decrease in the price of the Model 3. The reduction in price is due to a decrease in cost because physical stores are going to be closed. However, this factor is not going to be under consideration in the following figure. The only point of concern is that price is affecting demand and supply.
Price and Quantity Change of the Product:
Price and quantity demanded are linked, and the following figures exclusively focus on quantity demanded. With the decrease in price, the quantity would increase. It is the quantity demanded.
An important consideration should be there in the UK context, where the price would be 33000 pounds. It means that the price of the product in the United States and the rest of the world would be different from the UK market. It means that the quantity demanded would be lesser in the UK market than the rest of the world. However, the impact of the price must be there. It is worth mentioning the cause of this change in price. It is the closure of physical stores and moving to online channels. It is of no concern for economics because the only interest is of price (Martina, Rentsch, Höck, & Bertau, 2017).
Discussion
Globally, the electric car market is facing stiff competition. Although Tesla is the first mover and pioneer in the industry, it does not have the sweeping market share. The company has felt the competition from its rivals. It has to think ways to grow so that it can compete successfully. For this purpose, the company has to take measures. It is worth mentioning that economic concepts can help under steps taken by Tesla. It faced resistance from cost because it could not reduce the price of Model 3. It put the company in a difficult situation because it could not compete with rivals. Therefore, it planned to reduce the prices of the product. It had some problematic effects on the market. For instance, the company had been facing a decrease in the share price. It had to pay an amount in the settlement with the Securities and Exchange Commission. Moreover, the company had been losing money to the adverse economic situation around the company. In this context, it had to increase the quantity demanded from buyers (Investopedia, 2020).
Unfortunately, buyers have an affordability issue. It happens in the economy because the high price makes less demand. Similarly, firms want to produce goods in large quantities. The concept of economies of scale is related to it. Tesla might have been facing an issue with economies of scale as well. A limited number of goods produced by the company increases the cost per product. It is difficult for a company to reduce costs because it has to increase supply to do this. The step taken by the company has indirectly helped the company to do so. As a result, the firm can increase the supply of the product, and in so doing, it can further reduce the cost of the goods. However, there is a difference in supply and demand relationships concerning different markets (Moorhead, 2020).
In dollars, the price of Model 3 is going to be $35000, and in comparison with it, the price in pounds is 33000 pounds. In terms of affordability, the price would affect little in the UK market, and there would a lesser increase in quantity demanded. However, in terms of dollars, the effect would be higher than that would increase quantity demanded higher than that of the UK. It shows that firms should consider economic concepts in their business model so that they can yield benefits of differences in price. Any change in prices leads to more demand. More demand leads to an increase in supply. It leads to economies of scale. Collectively, it leads to more profitability. It is what Tesla is looking for from the strategy (Martina, Rentsch, Höck, & Bertau, 2017).
The electric car market is already competitive, and the level of competition is going to be stiff. Therefore, Tesla’s decision to reduce prices was timely, and it enabled the company to compete successfully. However, the firm should find ways to reducing costs further to bring prices down. It would require the firm to adopt more innovative and creative ways of manufacturing. Factors of production play a significant role in price setting. Therefore, the firm should continue focusing on this perspective.
Conclusion:
The essay concludes that Tesla has adopted a strategy to reduce the prices of its product, Model 3. A decrease in the price of the good was necessary to attract more quantity demanded. The firm has been facing competition from rivals because the electric car market is getting intense. The firm moved to sell the product online that reduced the price. In terms of economic principles, it has been noted that the firm would witness an increase in demand from buyers. However, this increase would be lower in the UK because the price would be a bit higher there. There would be higher demand in the rest of the world where the dollar price would be applied. The essay recommends using economic concepts to understand a phenomenon as it is the case with Tesla. Tesla can increase its market share by applying these concepts and in so doing; it can ensure its sustainable future.
References
Investopedia. (2020). Who Are Tesla’s (TSLA) Main Competitors? https://www.investopedia.com/ask/answers/120314/who-are-teslas-tsla-main-competitors.asp
Martina, G., Rentsch, L., Höck, M., & Bertau, M. (2017). Lithium market research – global supply,future demand and price development. Energy Storage Materials, 9(1), 171-179.
Moorhead, P. (2020). Tesla Is Years Ahead Of Competitors With No Signs Of Stopping. https://www.forbes.com/sites/moorinsights/2020/03/05/tesla-is-years-ahead-of-competitors-with-no-signs-of-stopping/#a5b2b2d9f459
Vaughan, A. (2019). Tesla cuts car prices, shuts stores and shifts to online-only sales. https://www.theguardian.com/technology/2019/mar/01/tesla-cuts-car-prices-and-shuts-stores-as-it-shifts-to-online-only-sales
