ECO511 : Economics For Business : Helping A New Model

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Subject: ECO511 Subject name: Economics for Business Name: Saiman Shrestha Student Number: 11648698 Lecturer: Maruf Mostafa Word limit: - 2000 Due date: 1st January, 2018 Explain, providing appropriate examples, why car manufacturers are constantly introducing new models. In recent times as consumers have been afforded multitude of choices in particular markets thanks to various reasons such as increase in their disposable income, exposure to the internet and globalization, companies have invested billions in research and development to keep up with the changes in customer preferences. Similar to any other industry, the modern automotive firms have to constantly evolve in order to survive under constant cutthroat competition. It is…show more content…
Depending on the type of market they operate in and the level of competition, the cost associated with product differentiation can vary. As the modern car market is a highly saturated one with many competing manufacturers whose customers have access to comprehensive, albeit not perfect, information about the specifications, prices, quality, we can render the modern car market to be a monopolistically competitive one (Salop, 1979). When discussing about whether a firm can generate profit in the long run by differentiating its product in the market, it simply boils down to the type of market in which it operates. For instance, producers of everyday items such as grocery items can earn regular income in short run without having to increase their cost of production on advertising as a result of homogeneity of the products. However, due to the presence of close substitutions, producers might have to lower their prices to keep their products competitive in the market. Moreover, firms in competitive markets concede the ability to set prices solely to the market forces (demand and supply). So, as they try to undercut rivals for profit, their attempts backfires as the rivals match their prices promptly (Bourdon, 1992). Monopolistic competition Hart (1985), defines monopolistic competition as, A situation where (1) there are many firms producing differentiated commodities ; (2) each firm is negligible, in

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