Page 63 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes
Did u know? Price Effect (KM) = Substitution Effect (KL) + Income Effect (LM).
The price effect can be broken up into two parts: income effect and substitution effect.
Income effect occurs due to increase (decrease) in real income resulting from a decrease
(increase) in the price of a commodity. Substitution effect occurs due to the consumer's
inherent tendency to substitute cheaper goods for relatively expensive ones.

Task Assign a measure of utility you are putting into your various subjects. Do
your study habits follow the principle of rational choice?

Case Study Auto Industry — Economic Slowdown as a
Determinant of Demand

utomobile sector is taken as the indicator of a modern and liberalised industrial
India. But as of now there is not much to write in praise of this star-studded sector
Awith gleaming Fords, Astras and Cielos. There is a gloom in this sector as on date.
The economic slowdown has led to unexpected downturn in demand.
With the first quarter of the current financial year (1997-98) having ended, the 30,000
crore automobile industry has shown very little signs of a much hoped for recovery from
the massive slowdown it registered last year. In fact it has shown continuous signs of a
decline in growth with most segments cutting down production due to poor sales and
inventory pile up. After witnessing whopping sales in 1995-96, the slowdown in the last
fiscal year was viewed by many as the inevitable correction in growth. However, the
continuing depressed condition has come as a dampener to the entire industry.

After becoming a blue-chip industry soon after the government liberalised the economy,
the automobile industry has been growing at break-neck pace, almost to the point of
being dubbed an overhead industry. The 1995-96 financial year saw the industry grow by
around 30%, the luxury car segment by nearly 130 per cent. Last year the growth rates
came back to normal figures, registering a decline of over 10 per cent. Worst affected was
the luxury car segment – from a 132% growth rate it registered a negative growth. Though
experts were quick to dismiss last year's poor performance, vis-à-vis 1995-96, as a correction,
the continuing depressed conditions are beginning to worry manufacturers as inventories
have started to pile up. With the general economy itself showing signs of a lethargy the
chances of a speedy recovery by the automobile industry look anything but likely.
Production and sale of vehicles has registered declining growths in the first two months of
the financial year according to the latest data released by the Association of Automobile
Manufacturers (AIAM). The only segment that was able to register any impressive growth,
both in production and sales, was the motor cycles segment. Despite the strong growth of
the solitary segment, the entire automobile industry showed a declining growth.
While automobile production showed a negative two per cent growth the sales were
dipping at a fraction over 0.6%. Worst affected were the scooter segment (production
down 14% and sales down 9%) and mopeds (production down 13% and sales 11%).
The poor sales of heavy commercial vehicles virtually sums up the performance of the
automobile industry. The industry is peculiar in the sense that most of the sales here take
place through hire purchase or financing. While the three major heavy truck manufacturers
Contd...

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