Table of Contents

1
brand
new
car
a
got
Hes
like
a
Looks
Jaguar ...Mercedes
Its
got
leather
seats
Its
CD PLAYER
got
a
2
Group One presents
3
Jamie Kendig Jason Kutzavitch Eliseo
RoquizEmily Sylanski A.J. Zubaty
4
Table of Contents
5
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 weve learned
  in Microeconomics to this successful automobile
  manufacturer.
  

www.mbusa.com
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
D0
D2
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 ? DECREASE in
  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
Price of Related Goods (cont.)
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
Taste (cont.)

• Demand for SUVs 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
www.polk.com/news/releases/2001_0104d.a
sp
16
Expectations of consumers

• Income and Prices
• Mercedes Benz produces many vehicles with a
  diversity of prices that are available to
  customers with various incomes

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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.

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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
D0
D2
Quantity
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Elasticity
?E? 8 Perfectly Elastic ?E? 1 Relatively
Elastic ?E? 1 Unitarily Elastic ?E? ively 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 3 Estimates 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

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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

S0
S1
S2
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
www.mbusa.com
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 increase the supply of the good
  
• The increase in the price of an alternative good
  will decrease the supply of the good

S0
S1
S2
Price
Quantity
26
Technology

• Technology may include their state of the art
  factories and machinery
  
• Changes in technology will increase supply 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
  suppliers 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

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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 Sedanall options the same
• 47,615.00 at John Sisson Motors
• -VS-
  45,545.00at Bud Smail Motorcars Limited

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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. www.vehix.com
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

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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.

www.mbusa.com
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 MRMC will
  not last in the market
  
• Example
• Delorean Motor Company(1986)

Kia Rio
Daewoo Lanos
http//deloreanmotorcenter.com/about_don.htmlhttp
//www.daewoous.com/DMindex.asphttp//www.kia.com
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

• Land

• Labor

• Capitol

• Entrepreneurial Activity

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

www.mbusa.com
40
Land (continued)
Each dot on the map represents a major
manufacturing facility owned by
Daimler Chrysler in the world.
www.daimlerchrylser.com
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 DaimlerChryslers
  plants (engine, assembly, glass, axle and
  stamping) and parts distribution centers.

www.mbusa.com
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
  

www.mbusa.com
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
• www.future.car

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 weve learned in Microeconomics
  
• By this, we are able to understand their
  decisions in production
  
• Questions?

49
Thank you for you attention.