The following paper aims to explore the different microeconomic concepts in the article entitled, ‘making Tesla.’ The specific concepts which have been identified in this article and hence shall be explored includes retail markup, barriers to entry, cost and benefit analysis, technology, and supply and demand. This paper has the aim of establishing whether Tesla’s ambitions are beyond their capabilities. For example, supply and demand will be used to assess the electric market and Tesla’s capability to meet their needs. On the other hand, costs and benefits will be used to assess how much the company is bound to spend in their electric car market and how much they will benefit from the industry.
Retail markup is used to refer to the retail price of a product that has a markup figured. According to the article, carmakers often sell their vehicles through independent dealers. In this case, they fail to retain the markup from selling cars by themselves. However, Tesla sells their cars through their website and showrooms, which are located in shopping centers. As a result, the company retains the retail markup. Evidently, Tesla’s strategy is essential, since it allows controlling the prices of their cars. As a result, they can compete with other carmakers by using price as their stronghold.
Barriers to Entry
The barriers to entry are used to refer to the obstacles that prevent new competitors from entering the industry. It consists of efforts by existing companies to enforce rules or policies that make it difficult for new companies to penetrate the market. In this case, Tesla entry into the car industry showed that the obstacles in the industry are lower than they are assumed. The company began by buying a factory worth $42 million. Additionally, the company bought equipment from carmakers that were struggling. According to Volcker, the total spending of the company taking research and development into consideration was less than $4 billion. The amount is significantly low considering that other automobile manufacturers spend a lot more than that in a year.
Cost and Benefit – Economics of Making Electric Cars
A cost and benefit analysis is a concept of economics that influences business decisions. In this case, cost is used to assess the amount a company is bound to spend while benefit is used to assess how much a company is bound to gain from their investment. The cost-benefit analysis examines different alternatives to find the best option that will maximize profits and reduce expenses. In this case, the concept provides a basis for comparison that ultimately leads to the determination if an investment decision is justifiable. The economics of making electric cars as reflected in the article does not have to cost the company highly. Tesla has achieved success in their operations while tackling the high costs that are associated with making an electric car. For instance, the power packs that the company uses are recorded to cost half the amount other big companies pay for their large-format batteries. Moreover, the company intends on cutting costs further to 30% once the Giga factory is complete and begins its operations. The trend is essential for the economy since it provides sustainable methods that can be utilized to benefit the company and the environment.
Fig. 1. Consumption function diagram
Technology – Sustainable Solutions
Tesla’s move to enter into the production of electric cars is a reflection of their aim to achieve sustainable solutions in the industry with the advancements in technology. Tesla considers itself to be a technological company (“Tesla’s Mass-Market Ambitions: On a Charge”). The company’s acceleration to the electric car industry is influenced by their technological advancements. Tesla is in the first-lane in the production of electric cars that will be affordable. Sustainable solutions are also evident through the company’s measures to reduce costs while providing their target audience with quality and high performance vehicles. The company’s efforts of sustainability are evident through their aim to create a network of more than 3,500 superchargers where their consumers can charge-up without incurring any costs. Additionally, such a strategy reflects on the company’s integration. According to Howarth, sustainable solutions are essential to the economy since they ensure that the earth does not lose its pleasantness, which leads to an increase of wealth based on the ability of the eco-system to support a larger population (32).
Fig. 2. Supply and Demand
Supply and Demand – Market for Electric Cars
Supply and demand is a fundamental concept of economics that assesses the market. In this case, demand is used in reference to the amount of products that are desired by the target buyers. On the other hand, supply is used to reflect on how much the market has to offer. Electric cars have a ready market among rich individuals in the society who seek to use products that are environmentally friendly. In this case, demand for electric cars favors Tesla in their aims to supply a stylish and fast saloon car that will be powered by a battery. The electric cars market is not subjected to a lot of competition with companies such as Mercedes Benz and BMW being the dominant parties in the efforts to produce cars that will run solely on electricity. However, the car industry subjects Tesla to threats based on the fact that the competition is intense and the profit margins are slim (“Tesla’s Mass-Market”). The growing market for electric cars is essential for the economy based on the significant reduction in pollution of the environment. Additionally, the application of sustainable resources will benefit the economy through the preservation of natural resources.
Fig. 3. Circular-flow Diagram
The article on “Making Tesla” provides a critical analysis of various microeconomics concepts such as barriers to entry, retail markup, cost and benefit analysis, supply and demand, and the use of technology in marketing in relation to Tesla’s decision to venture into the car manufacturing industry. According to the analysis above, it is clear that Tesla’s ambitions are achievable. In this regard, Tesla’s markup strategy is essential, since it allows controlling of the prices of their cars. As a result, they can compete with other carmakers by using price as their stronghold. Additionally, Tesla entry into the car industry showed that the obstacles in the industry are lower than they are assumed. The company began by buying a factory worth $42 million. Additionally, the company bought equipment from carmakers that were struggling. The amount is significantly low considering that other automobile manufacturers spend a lot more than that in a year. In relation to cost and benefit analysis, the economics of making electric cars as reflected in the article does not have to cost the company highly. Tesla has achieved success in their operations while tackling the high costs that are associated with making an electric car. On the other, the technological aspect of the company helps Tesla to accelerate into the electric car industry by influencing their innovations. Tesla is in the first-lane in the production of electric cars that will be affordable.
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