Elasticity...?

Question

A fall in input prices has led to higher output of Porsches. But total revenue for the Porsche Company has declined as a result. What had happend?

Answer 1

The company had to cut prices to sell more cars. In percentage terms, the cut in prices had to be greater than the increase in quantity produced, which suggests relatively inelastic demand...

Answer 2

NC is spot on... Decrease in revenue, with the assumption that there was a decrease in price as well, indicates that the Demand for Porsches is inelastic. However, with this question one has to assume quite a bit.
1) Demand has not changed
2) Porsche Company decided to pass on the cost savings to the consumer by lowering prices in an attempt to sell its higher output.
3) Substitutes also experienced a decrease in input prices which also resulted in higher outputs and lower prices.
But these are standard assumptions in a basic elasticity question.

Answer 3

This isn't exactly a classical elasticity problem. I'm guessing that what we have here is an example of the "snob effect." That is, the economic class of people who can buy porsches actually prefer NOT to buy one if they become cheaper or more common, and would instead buy a lotus or something. With the snob effect factored in, a demand curve can be quite steep or even positively sloped at some points. The result could be lower revenues for the producer.

Answer 4

This is not only a classical situation of the application of reality of elasticity of demand but a practical reaction of a particular type of elasticity of demand. The product in question, Porsche is an article for the rich and affluent., such product do not respond to the law of demand and supply in the conventional notion of “the lower the price the higher the demand”. The situation here is that the fall in price is not on the finished product but its inputs. The resulting higher output also was not also related to demand. What happened was the natural reaction of the combination of financial and accounting department responding to benefit of more from same total cost They realise that the reduction in input prices give them the opportunity to produce more with the same budget, i.e. total cost. They are oblivion to the reality of the inelasticity of demand for their product. The buyers of Porches are not just rich and wealthy but usually young, in show-biz, and play-boyish. The product also last for a life time and hence repeat purchases are very uncommon. While families could have more than one cars, such as having different models of Benz, hardly will a family have two Porches in their garage.
Production responded to lower unit cost arising from reduction in fall of input prices with the intension of lower unit cost and expecting the maximisation of circumstantial profit. They forget the determinant- demand.. The main stupidity is the neglect of the fact that the more porches produced the less the demand by the regular users. Porsche is an "article of ostentation", “the lower the price, the lower the demand” as the regular owners would feel that the item will become common. Rather than increase output the surplus from reduction of input prices should have been used on sale promotions and other sales-boosting activities. These will increase sales. In real practice, manufacturers of porches will not be looking for annual continuous significant increase in sale or output but strive to ensure that they maintain steady and stable share of the market. In fact, an increase in price, despite the fall in input prices might ("ceteris paribus") have been more economically strategic in the circumstance of this article ostentation. In conclusion, the situation is not as simple as it seems but it is not as complex for those who do not consider the narrow angle of elasticity of demand. There is more to elasticity than stretching and expanding. It is not always the case that an increase in a unit or parts of a product should demand a corresponding increase in its output. The fall in input prices would have been seen as a boost for other facilitations. The market is not for accounting or financial brains only but the knowledge of economist of practical experience is vitally necessary

Tayo Ojetunde B.Sc Hons (ECONS)

Answer 5

May be their sales has gone down. Or they haven't marketed it well.. Can give a million reasons .Need more data .

Answer 6

wait...what