No+Smooth+Road+Ahead+as+Carmakers+See+Falling+Sales+by+Yipsum

//**REMEMBER: DO NOT SUMMARIZE THE ARTICLE!!!**//

=TITLE OF EXTRACT:= No smooth road ahead as carmakers see falling sales

=SOURCE:= Shanghai Daily [|http://www.shanghaidaily.com/article/?id=495853&type=Business] =DATE EXTRACT WAS WRITTEN:= March 5, 2012

=DATE CURRENT EVENT WAS WRITTEN:= March 5, 2012

=EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:= The European auto industry is an oligopoly composed of a few firms including Fiat, PSA Peugeot-Citroen, Opel, Renault and Ford Europe. These firms all sell the same item – cars – although their products are all slightly differentiated. It is difficult to enter and leave the industry without suffering losses.

As European auto demand decreases, the automakers are making losses because they have to split less profits among the same amount of firms. They are still using the same amount of factors of production, and their costs of production outweigh the profits they gain from selling cars.

It is estimated that car sales will decline by 5%. According to economic theory, to maintain equilibrium, supply will have to decrease. As some firms are unable to sustain heavy losses caused by dwindling profits, some will leave the industry and the demand will be evened out until the firms reach the point of breaking even again.

=VOCABULARY TERMS AND DEFINITIONS:=
 * Oligopoly: a state of limited competition, in which a market is shared by a small number of firms.
 * Demand: the quantities of a good or service that consumers are willing to and able to purchase at given prices in a given time period
 * Factors of production:inputs or resources that go into the production of goods and services - land, labor, capital, entrepreneurship.
 * Supply: the quantities of a good or service that producers are willing to and able to produce at given prices in a given time period
 * Breaking even: a point where firms are neither gaining losses nor profits.

=DIAGRAMS:=

=EVALUATION:= The current situation in the European Auto Market is that demand is decreasing due to buckling of consumer confidence and current economic recession. There are two ways to maintain equilibrium – to decrease supply or to increase demand. It is very hard to increase demand in the current situation because the economy is in recession, meaning that the European economy is in temporary decline and trade and industrial activity will be reduced. Also, when the people are losing consumer confidence, it will take extra amounts of advertising or subsidies so that demand will increase. If the government chooses to subsidize the auto industry, this calls in a certain opportunity cost because the government can choose to introduce subsidies to other sectors of development, such as education and healthcare. The most direct and fastest solution to maintain equilibrium is to decrease supply. As the article says, there are already firms that are going bankrupt, which is showing that this is the most direct solution to the problem.

As a result, those firms who don't have very strong sources of income and greater consumer confidence and interest are more vulnerable to being becoming bankrupt and dropping out of the industry. In this situation, both producers and consumers are losers because they are both losing money. As Europe goes into economic decline, the people have less money to spend and will choose to spend their money on products that they need more. Cars are expensive and are relatively price elastic in comparison to other products such as food and other basic resources, and this is perhaps why car sales have been estimated to continue to drop a further 5% in the next years. Also, the fact that firms have much unused space to produce items shows that they are paying for factors of production that don't go directly into creating cars that are being sold. This is why in the graphsshowing losses ATC is greater than profits earns