Automobile Demand and Supply Analysis in India

Topics: Supply and demand, Demand curve, Inverse demand function Pages: 7 (1785 words) Published: November 2, 2010

Indian Automotive Industry started its new journey from 1991 with de-licensing of the sector and subsequent opening up for 100 percent FDI through automatic route. Since then almost all the global majors have set up their facilities in India taking the production of vehicle from 2 million in 1991 to 9.7 million in 2006.

The surge in number of people with higher purchasing power along with strong growth in economy over a past few years has attracted the major auto manufacturers. The market linked exchange rate and availability of trained manpower at competitive cost has added to the attraction of Indian market. This increasing pull of Indian market on one hand and the near stagnant rate of growth in auto sector in markets of USA, EU and Japan have worked as a push factor for shifting of new capacities and capital in the auto industry to India. The increasing competition in auto companies has not only resulted in a spurt in choices of Indian consumers at competitive costs, it has also ensured an improvement in productivity by almost 20 percent a year in auto industry, taking it to one of the highest in Indian manufacturing sector.

The production of all categories of vehicles has grown at a rate of 16% per annum over the last five years.

The Demand Side Analysis
1. Law of demand
2. Movements along the demand curve and shifting of demand curve 1. Law of demand
The Law of Demand states that the relationship between a good’s price and the quantity demanded of that good is negative. This is referred to as a “change in quantity demanded”. Own-price change cause movement along a given demand curve. The demand for automobiles for is dependent of certain factors: The demand function for X:

XD = f (PX, Ps, Pc, I, T&P, Pop, A, O, PPP, R, SP, Av, In, Tr, F)

XD = quantity demanded
PX = X’s price; the price of a automobile
Ps = the price of substitutes
Pc = the price of complements
PPP = Purchasing Power parity of the consumers
R = Rising income level of the consumer
I = Inflation of the country
A = after sales service cost
T&P= tastes and preferences
Pop = population in market or market size
O = Oil prices
SP = Price of Spare Parts
Av = Availability of nearby service station
In = Lack of proper roads
Tr = Traffic Condition on the Roads
F = Financing options available in the market.
2. Movement along the demand curve and Shifting of demand curve

* Changes in this causes movements along the demand curve:

* A change in the quantity demanded is a movement along the demand curve. * A movement along the demand curve for X would be caused by a change in Px. * When price increases, the quantity demanded by consumers falls at every price and when price decreases, the quantity demanded by consumers rises at every price.

When price increases from $1000 to $5000, the quantity demanded decreases from 3 units of automobiles to 2 units of automobiles.

* Changes in these shift the demand curve:

* Number of buyers
* Tastes and preferences
* Income of the consumers
* Purchasing Power Parity
* Change in Fuel Prices
* Lack of Infrastructure Facilities like Roads, etc.
* Price of substitutes or complements
* Expectation of future prices

* Shift of the entire demand curve is caused by a change in one of the “ceteris paribus” demand variables. * This is referred to as an increase or decrease in demand. * An increase in demand is a rightward shift in the entire curve. A decrease in demand is a leftward shift in the entire curve.

1. Number of buyers

* Demand is originating from new segments of the market; Apart from the usual clientele like industrialists, film stars and chairpersons of companies, an increasing number of young professionals like doctors, chartered accountants, lawyers and software professionals owning...
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