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Berkeley ECON 100A - Econ 100A Participation

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Nika Qiao Participation Application The revival of incentives for automobiles demonstrates all of the major themes of microeconomics from trade-offs to prices and markets. In a market economy, prices are determined by the interaction of consumers, firms, and workers. These interactions form the basis of the market where buyers and sellers gather together for transactions. The auto industry offers a well known example of price determination and market interactions through competition. The major automakers such as Ford, General Motors, and others must now compete not only on vehicle specifications but also on incentives on their products. The auto market represents a highly competitive market despite its relatively low number of producers. The major auto makers are forced to compete fiercely for market share against established firms and new entrants as America shifts to a new equilibrium for its fuel economy. The rapid fluctuations between car offers and incentives over the months reflects the continuing competitiveness of the market from decisions based on trade-offs and opportunity costs. The auto industry faces the restraint of trade-offs from rising oil prices and interest rates. The firms face limits on product output and the resources viability. Many of the major auto firms are well equipped to produce fuel inefficient vehicles such as SUVs and trucks but are not very good at producing new fuel efficient cars. Firms incur opportunity costs from its potential profits of selling fuel efficient cars instead of offering its current vehicles with incentives. The major auto companies however choose to focus its resources on mass producing fuel inefficient vehicles at discount. The firm thus maximizes its profits and resource usage given its restraints. The consumers also face trade-offs and limitations in their allocations of resources. Consumers have limited income and thus must make decisions for utility maximizations in their product choices. The utility between free gas back offers for SUVs or greater long- term fuel efficiency of hybrids has now become an 1increasing trade-off decisions in recent months. Consumers maximize their resources through purchases that balance preference, utility, and opportunity costs. Car buyers make decisions on whether to accept current offers from the major auto retailers or new fuel efficient car offers from new auto industry entrants. The sales and resale growth of fuel-efficient and hybrid vehicles means greater opportunities for economical profits and incentives for new auto makers to enter this sector of the auto industry. Established firms have reacted to consumer and competitors choices for future product decisions and offer incentive packages in order to gain back market share. The sellers’ competitive offers of incentives and discounts demonstrate their factor in price determination against their competitors. Buyers have shifted preferences towards auto choices in response to price changes from the sell side of the oil market. The auto market seller side must then react through new marketing schemes or new production shifts. The cycle of consumer and seller reactions and interactions thus determine prices between this gathering of buyers and sellers in the market. The auto market is thus its own micro-economy with buyers and sellers trying to maximize their benefits against their costs. 2Car Industry Brings Back Incentives To Counter High Fuel Prices, Rising Interest Rates, Dealers Offer As Much as $6,000 in Rebates or Gas By GINA CHON May 2, 2006; Page D1 http://online.wsj.com/article/SB114653176002241084.html?mod=autos_3With high gasoline prices and rising interest rates weighing on consumers, car dealers and auto makers are reviving a range of buying incentives. Some car dealers are bringing back free-gas offers that were popular last year as gasoline reached $3 a gallon following Hurricane Katrina, and this time many are sweetening the offers. One California dealer this week began offering customers a choice between cash rebates of thousands of dollars or up to $6,000 of free gas when purchasing certain vehicles. And zero-percent financing is once again a popular promotion among car makers looking to pare inventory of older models. At the same time, there is some evidence that gas prices may be reaching a level that is changing some consumer's vehicle preferences. "Everybody is concerned about fuel economy," says Lou Lombari, general manager of the Linden Dodge and Linden Volkswagen dealerships in Linden, N.J. "Customers are trading SUVs in for something less of a gas guzzler." Rowina Zenzal of Santa Barbara, Calif., bought a 2006 Nissan Armada SUV four months ago, but decided to put it up for sale a week ago. She says she couldn't afford to keep the vehicle because of high gas prices, which have reached $3.50 a gallon in her area. The SUV, with only 4,000 miles on it, is selling for $33,500, about $5,000 less than what she paid for it. "It was costing us $80 to fill the tank," Ms. Zenzal says. "Now we are looking to buy a used Honda Accord or Civic. Something that won't cost so much to fill up." Last summer, car sales hit record levels because of employee-discount programs offered by General Motors Corp., Ford Motor Co. and Daimler-Chrysler AG's Chrysler Group. Since then, auto makers have been trying to wean customers off such large incentive programs, and have opted for traditional cash rebates to bring consumers into showrooms. FINANCING DEALS Some of the incentive programs from car makers: • Ford is offering zero-percent financing on Milan Monterey, Ford Ranger and Ford Freestar. • Chrysler is bringing back zero-percent financing for most models. • GM is offering zero-percent loans for 2006 models of Cadillac Escalade, Chevrolet Tahoe and GMC Yukon. GM, which posted a loss of $10.6 billion last year, has revamped its pricing strategy to rely less on incentives, which would boost profitability on its vehicles. For its March Madness program, GM offered a relatively small incentive: $500 to $1,500 cash back, which failed to lure many 3buyers. On the other hand, Chrysler has been offering $1,000 to $5,000 cash back, which has drawn more buyers. Auto makers will report April sales figures today. Many of Ford's national zero-percent offers ended yesterday, but a number of dealers are continuing the promotions in various regions. For May, Ford is continuing its zero-percent offers for


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