South-Western College Publishing - Economics  
European Carmakers Try To Turn The Corner
Subject Product and Cost Curves and Profits
Topic Production and Costs
Key Words Sales, Prices, Profits, Cost-Cutting, Efficiency, Consumer, Demand, Production
News Story

European car sales in 1999 are expected to be slightly below the 14.3 million of 1998. In addition, car prices are expected to decline for the first time on a year-over-year basis. Therefore, the challenge for carmakers is how to keep profits up.

Cost-cutting is one strategy. GM Europe is going to raise the efficiency of its Russelsheim, Germany, manufacturing complex through modular assembly techniques. Daimler-Chrysler is separating the assembly lines for its Mercedes cars so that the models can be built in much shorter time periods.

Also, auto producers are trying to design cars that have the customer in mind. Ford's engineers receive various consumer data, such as demographics and preferences, which help inform their designers. Finally, some models, like the Opel (GM) Zafira (a mini-minivan), already have pent-up demand and there are plans to increase production.

(Updated May 1, 1999)

1. Draw a diagram with axes representing the number of workers and their total product at a GM Europe factory. Add the total product curve and mark an efficient point at which GM might be.
  a)If modular assembly is introduced, what will happen to the total product curve and the point of production? Illustrate and explain your answer.
  b) If the level of production is stepped up, what will happen to the total product curve and the point of production? Again, illustrate and explain.
2. Draw a diagram showing the marginal and average total cost curves for the GM Europe facility. Add a horizontal price line such that the plant is making a profit.
  a)Show what happens to profit when the producer is forced to reduce price because of consumer resistance and lower sales.
  b)If the producer is successful in reducing costs through shorter production times, which curve(s) will shift? Why?
  c)Illustrate the effect on profit of the shifts that you have identified in (b).
3. If giving engineers more data results in more attractive car designs, what will happen to the profit of the carmaker? Illustrate and explain your answer in another diagram of costs and price.
Source Micheline Maynard, "Carmakers try to keep European sales hot", USA Today, March 22, 1999.

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