Mercedes Company Demand and Supply

For a long time, Mercedes-Benz has been at the forefront of the global automobile business. Despite fierce competition from other companies, the Firm has been able to maintain its competitive advantage. The Business has achieved this unparalleled success by ensuring a high demand for its products (Porter 56). This viewpoint is reinforced by basic economics, which holds that for any product to produce sales, a company must devise tactics to ensure that demand for the product is high. As such, a clear understanding of the various elements of demand and supply is imperative for the success of any Company.

This paper delves into the case of Mercedes where the various elements of demand shall be broadly discussed. The paper shall also cover the demand elements of Mercedes G Wagon in real life application. The paper will also consider the characteristic comparison and sensitive analysis to show the reasons as to why the product outshines the other substitute to become outstanding. Mercedes G Wagon will also categorize to know the type of demand it is. In addition the utility of the commodity will discussed whether it is monotonicity or convexity including marginal utility satisfaction and indifference curves.

Since its formation, Mercedes Benz has branded itself as the unrivaled quality vehicle manufacturer in the world. It has been able to achieve this by emphasizing on quality as opposed to other vehicle manufacturing Companies and as such this has helped the Company to drive growth in revenue. The Following are the determinants of demand and supply and a brief discussion on how Mercedes Company is fairing as far as the elements of demand are concerned.

Price of a Commodity

The price at which a commodity retails is very imperative in determining whether a commodity will be purchased or not. Basic economics alludes that the lower the price of a commodity the higher the quantity demanded (Funke 26). This assumption is based on the rationality principle where consumers are assumed to prefer cheap to expensive. This assumption however does not hold in all situations because there are instances where consumers tend to violate this basic principle of economics. This is especially the case when the goods involved are not of a normal nature. These goods include cheap necessities and goods of ostentation which are also referred to as luxurious goods. Mercedes by nature targets the high end market. This market always associates itself with class. As such, this market always prefers expensive to cheap. When the price of a Mercedes is high, this market tends to think that this is the case because of increased quality of the vehicle model. The Company has been able to utilize this factor to its advantage by charging premium prices on its products. By doing this, the Company has been able to experience tremendous increase in revenue growth which has had the trickledown effect of positively impacting on a Company’s profits.

Quality

The quality of a product is very important in determining whether the commodity will be purchased or not. There is no conventional way of determining whether a product is quality or not and as such most of the time quality is a matter of perception of customers. If consumers believe that a certain product is of high quality they will tend to purchase such a product because they believe that the product will satisfy their needs and that it will be long lasting. On the other hand if customers have negative perceptions about a certain product demand drops significantly. The customers of Mercedes most of the time believe that the products of the Company are of very high quality and as such tend to purchase them despite the high prices. The Company has tried to ensure that quality products remains part and parcel of the culture of the Company. This has gone a long way in ensuring that the Company retains its customers.

Availability of Substitutes

Since consumers prefer variety, availability of close substitutes is important in determining whether a product will be purchased or not. Elementary economics supposes that if a product has close substitutes it is likely to face stiff competition from the rival product and as such the demand of the product will decline (Funke 25). On the other hand, if a product does not have close substitutes, it will not face any form of competition and as such will experience high demand. The automobile industry consists of many Companies that are on the lookout to increase the demand of their products by targeting the same customers as that one being targeted by Mercedes Company. Some of the close competitors of Mercedes are BMW, Ferrari, Volvo, Aston martin, Audi and Porsche. These Companies have tried to come up with products which are of similar quality to those developed by Mercedes Company.

Price of Related Products

The demand of a commodity is also determined by the price at which the related commodities are being sold at. Elementary economics supposes that if the price of related commodities is high, a commodity generates high sales as compared to if when the price at which related commodities sell is low. This however will hold waters if and only if the commodity in question is a normal good. For goods of ostentation, the scenario may be different. This is because Mercedes deals with goods which are of luxury nature.

The Type of Goods

Mercedes G Wagon falls under luxury goods. This implies that an increase in income causes a bigger increase in demand. When individuals’ income is increased, they will tend to upgrade their social class position. This will cause them to go for goods which have higher value to stand tall among others in the society.

Mercedes G Wagon is also a giffen good. Since types of cars are rare, an increase in price causes an increase in demand. The reason is that the income effect of a rise in price causes one to buy more of this cheap good because you cannot afford more expensive good.

The fact that people think that the more expensive a good is the better the quality of the good, therefore as G Wagon is expensive, people think of it as very high quality product and better than the rest of the cars of its type. This therefore makes it to be a snob good.

Utility

Utility is a measure of preference over some set of goods (services included) that satisfies human wants, it therefore represents the satisfaction experienced by the consumer of goods. Consumers by nature seek satisfaction when consuming a certain type of good. It is the responsibility of the Company to ensure that the needs of their customers are well understood so that the products are tailor-made to suit the varied needs of the customers. Utility can be described as either convex or mnonotonicity. Monotonocity describes a situation whereby the demand of a certain product depicts diminishing marginal utility (Crouzeix 72). This is usually the case when people continuously get satisfaction from a certain product. Here, averages are more desirable. Consumption of Mercedes cars does not exhibit monotonicity. Consumers are always eager to purchase the next model car produced by the Company. As such, utility is convex.

The design of the Mercedes G Wagon of the interior of the Mercedes G Wagon is quite unique in its own sense as it is handcrafted. The internal design leather and wood make the outcome to be considered of high quality and the highly attractive interior.

The performance of the Mercedes G Wagon is also powerful as it is all wheel drive therefore giving confidence in any season. In addition to being a four wheel the horse power that is behind the wheels make it perfect for any season. Both the body and the engine allow it to go where other cars cannot be dare to go. With these facts the demand for such a product that can last longer even in extreme conditions will increase as everyone requires a machine that will always last longer.

The class and uniqueness that the G wagon has makes it to be among the most expensive cars. This therefore makes it to be have higher value and it is therefore associated with rich people in the society and those from a higher class in the society. This makes the demand to rise along the rich individuals.

Lancaster Table

The following is the table of Mercedes Company which contains the prices at which the product is being sold and the corresponding quantity sold. The table is specifically for Mercedes G Wagon class

Year

2013

2014

2015

2016

Sales(Units)

50,000

45,000

60,000

61,400

Price( Us dollars)

2000

2150

2300

3000

Note: The price of the vehicle could change according to the import tax being charged by the importing country. The above listed prices are the once that were charged from the home country of Mercedes which is Germany. Moreover, it is imperative to note that the dollar changes in prices might have been caused by the changes in foreign exchange.

Sensitivity Analysis

From the above figure it is clear that when the price of the commodity increased sales the number of units demanded also increased. This is a clear indication that the commodity under consideration is a luxurious commodity and as such people will always purchase the Mercedes G wagon despite the price increase. This would be a different story if the commodity under consideration was a normal good.

Year

Sales(Units)

% Change

Price( US dollars)

% Change

2013

50,000

0

2000

0

2014

45,000

-10

2150

7.5

2015

60,000

33.33333333

2300

6.976744

2016

61,400

2.333333333

3000

30.43478

From the table above, it’s clear that when the price increased by 7.5% in year 2014, the quantity demanded dropped by 10%. This can be explained by the panic which might have been caused by the instant increase of price which the customers had not anticipated. In year 2015 however, the increase in price did not negatively affect on the quantity demanded of the product. Instead, the quantity demanded increased. This is because the customers had anticipated the change. The same thing happened in year 3 where despite a 30% increase in price the quantity demanded increased by 2.333%

This paper has been able to delve into the various elements of demand by using Mercedes Company case to understand the underlying issues. It is important for any Organization to understand the various elements of demand as it is through this that an Organization can be able to craft policies geared towards ensuring the Company experiences unprecedented growth.

Works Cited

Crouzeix, Jean-Pierre, Juan Enrique Martinez Legaz, and Michel Volle. Generalized Convexity, Generalized Monotonicity:. Recent Results: Recent Results. Vol. 27. Springer Science & Business Media, 2013, 2014.

Funke, Michael, and Sean Holly. The Determinants of West German Exports of Manufactures: An integrated Demand and Supply Approach. Review of World Economics 128.3 (1992): 498-512, 2015.

Porter, Michael E., Christian Ketels, and Mercedes Delgado. The Microeconomic Foundations of Prosperity: Findings From The Business Competitiveness Index. The Global Competitiveness Report 2007–2008 (2007): 51-81, 2014.