Answer to Question #130583 in Economics of Enterprise for kay

Question

The Ford F-150 (best selling vehicle in the U.S. for the last three decades) is currently priced at
about $40, 000 to $45, 000. Show what would likely happen to the amount of vehicles
offered for sale if the vehicle price went up to $52, 000.

Answer 1

The amount of Ford F-150 series offered for sale is expected to increase. The reason is that the law of supply states that, ceteris paribus, own price and quantity supplied are pisitively related, and also that price plays a crucial role is determining the behaviour of market players. The price incentive and signalling functions redistribute scarce resources toward the production of more profitable products. With the increase in the price of the Ford F-150 to $52,000, the Ford company is expected to allocate more of its scarce resources towards the production of the now more profitable F-150 series. Car dealers are also expected to increase the stocks of the now more profitable Ford F-150. Thus, the quantity of Ford F-150 offered for sale increases as price increases, ceteris paribus.

This means that the Ford Motor Company will reduce resources allocated towards the production of other products in its portfolio, such as, Lincoln luxury vehicles and sport utility vehicles (SUVs), and allocate them towards the production of the now more profitable Ford F-150. The quantity supplied will thus increase.

It is pertinent to note that Ford Motors has many competitors such as the General Motors company (GM), Toyota Motor company (TM), Daimler (DDAIF), Tesla Motors (TSLA), and Honda Motor company, resulting in the market for vehicles in the U.S. being heavily contested. Ford F-150 is thus being competed strongly with brands like Chevrolet Silverado, Toyota RAV4, Honda CR-V, Nissan Rogue, Toyota Tacoma, Toyota Corolla, and many more. This stiff competition is expected to reduce the quantity demanded for Ford F-150 when price increases. The reduction in quantity demanded due to the existence of these close substitutes will reduce the profitability of the Ford F-150 series as buyers turn for the now cheaper substitutes. Eventually, the market forces will result in car dealers reducing the quantity of the Ford F-150 they stock, and the Ford Motor company will also reduce the amount they produce and they offer for sale.

However, by further analysis, Ford F-150 enjoys superiority over its substitutes in terms of fuel efficiency, high acceleration, drivabity, high safety scores, a more powerful engine reliable for haulage, and more. These superior features make the price elasticity of demand for Ford F-150 less elastic. As a result, an increase in price will have a little impact on quantity demanded, and hence promoting an increase in profitability. More of the brand will be produced, and more will be stocked by dealers. Thus, the increase in price will result in more vehicles being offered for sale.