Names: Shailesh Bhandare (80303120005) Nipun Shetty (80303120050)

Subject: Microeconomics

Assignment No.1

Honda Siel Cars India Limited

History:

Soichiro Honda (17 November 1906 – 5 August 1991) had an interest in automobiles. He worked as a mechanic at the Art Shokai garage, where he tuned cars and entered them in races. In 1937, with financing from an acquaintance, Kato Shichirō, Honda founded Tōkai Seiki (Eastern Sea Precision Machine Company) to make piston rings working out of the Art Shokai garage. After initial failures, Tōkai Seiki won a contract to supply piston rings to Toyota, but lost the contract due to the poor quality of their products. After attending engineering school, without graduating, and visiting factories around Japan to better understand Toyota's quality control processes, Honda was able, by 1941, to mass produce piston rings acceptable to Toyota, using an automated process that could employ even unskilled wartime labourers. Tōkai Seiki was placed under control of the Ministry of Commerce and Industry (called the Ministry of Munitions after 1943) at the start of World War II, and Soichiro Honda was demoted from president to senior managing director after Toyota took a 40% stake in the company. Honda also aided the war effort by assisting other companies in automating the production of military aircraft propellers. The relationships Honda cultivated with personnel at Toyota, Nakajima Aircraft Company and the Imperial Japanese Navy would be instrumental in the postwar period.A US B-29 bomber attack destroyed Tōkai Seiki's Yamashita plant in 1944, and the Itawa plant collapsed in the 1945 Mikawa earthquake, and Soichiro Honda sold the salvageable remains of the company to Toyota after the war for ¥450,000, and used the proceeds to found the Honda Technical Research Institute in October 1946.With a staff of 12 men working in a 172-square-foot (16.0 m2) shack, they built and sold improvised motorized bicycles, using a supply of 500 two-stroke 50 cc Tohatsu war surplus radio generator engines. When the engines ran out, Honda began building their own copy of the Tohatsu engine, and supplying these to customers to attach their bicycles.

This was the Honda Model A, nicknamed the Bata for the sound the engine made. The first complete motorcycle, both frame and engine, and made by Honda was the 1949 Model D, the first Honda to go by the name Dream. Honda Motor Company grew in a short time to become the world's largest manufacturer of motorcycles by 1964.

The first production automobile from Honda was the T360 mini pick-up truck, which went on sale in August 1963.Powered by a small 356 cc straight-4 gasoline engine; it was classified under the cheaper Kei car tax bracket. The first production car from Honda was the S500 sports car, which followed the T360 into production in October 1963. Its chain driven rear wheels points to Honda's motorcycle origins.

Over the next few decades, Honda worked to expand its product line and expanded operations and exports to numerous countries around the world. In 1986, Honda introduced the successful Acura brand to the American market in an attempt to gain ground in the luxury vehicle market. Honda in 1991 introduced the Honda NSX supercar, the first all-aluminium monocoque vehicle that incorporated a mid-engine V6 with variable-valve timing. Later, 1995 gave rise to the Honda Aircraft Company with the goal of producing jet aircraft under Honda's name

Manufacturer Total salesMaruti 81087Tata 31081Hyundai 29601Mahindra 14980General motors 9403Toyota 5989Honda 60520Ford 2453Fiat 2302Skoda 1881Hindustan motors 866Force motors 606Mercedes benz 403Bmw 341Vw 319Audi 190

Market share: Honda=3.41

Market Size (INDIA):   16.2 billion

Sales volume: HONDA CITY=60520.

Month on month growth= HONDA CITY

Feb 2012=6052

Jan 2012=1503

Competitors: Maruti, TATA, TOYOTA, SKODA etc.

Products Line: The Company’s product range includes Honda Brio, Honda Jazz, Honda City, Honda Civic and Honda Accord which are produced at the Greater Noida facility. The Honda CR-V is imported from Japan as Completely Built Units.

Understanding the demand and supply of the products:

Honda: After a dreadful January that marked Honda’s lowest point ever, February brought some respite in terms of production & part supplies. The Brio – a well priced Honda hatchback – is gaining traction and closes Feb at 2,000 shipments. The City is back with a bang, bringing home a stunning 6,000+ sales. The Jazz has a lot of potential with its repositioning, albeit we have yet to see any effect of the price cuts. The CRV has a pretty good run with a 100 imports. The Civic & Accord, however, continue to under-perform. The all-new generation Civic doesn’t appear to be much different and I doubt it will make any impact sans a diesel engine. Perhaps, that’s why Honda is dragging its feet in bringing the car to Indian shores.

Factors affecting demand and supply:

The surge in number of people with higher purchasing power along with strong growth in economy over a past few years has attracted the major auto manufacturers. The market linked exchange rate and availability of trained manpower at competitive cost has added to the attraction of Indian market. This increasing pull of Indian market on one hand and the near stagnant rate of growth in auto sector in markets of USA, EU and Japan have worked as a push factor for shifting of new capacities and capital in the auto industry to India. The increasing competition in auto companies has not only resulted in a spurt in choices of Indian consumers at competitive costs, it has also ensured an improvement in productivity by almost 20 percent a year in auto industry, taking it to one of the highest in Indian manufacturing sector.

The production of all categories of vehicles has grown at a rate of 16% per annum over the last five years.

The Demand Side Analysis:

1. Law of demand2. Movements along the demand curve and shifting of demand curve

The Law of Demand states that the relationship between a good’s price and the quantity demanded of that good is negative. This is referred to as a “change in quantity demanded”. Own-price change cause movement along a given demand curve

The demand function for X:

XD = f (PX, Ps, Pc, I, T&P, Pop, A, O, PPP, R, SP, Av, In, Tr, F)

Where:XD = quantity demandedPX = X’s price; the price of a automobilePs = the price of substitutesPc = the price of complementsPPP = Purchasing...

Demand & Supply: 1. Supply and Demand analysis is in many ways the cornerstone of economics.2. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

Price: 730000 to 1100000

Sales volume: HONDA CITY=60520.

Demand and supply curve:

The supply curve moves to the right when the non price factor changes.As demand increases because of change in price,to meet that demand there should be increase in supply so supply curve shifts rightwards.

Price elasticity of demand: A small change in price of mid segment Honda cars like Honda city ,civic etc leads to a huge change in the quantity demanded.This is called as relatively elastic demand or (ed>1).So there is scope for improvement.

Elasticity of demand:

Movement along the demand curve and Shifting of demand curve:-

Changes in this causes movements along the demand curve:

Price

A change in the quantity demanded is a movement along the demand curve.

A movement along the demand curve for X would be caused by a change in Px

When price increases, the quantity demanded by consumers falls at every price and when price decreases, the quantity demanded by consumers rises at every price.

Example:When price increases from $1000 to $5000, the quantity demanded decreases from 3 units of cars to 2 units of cars.

Changes in these shift the demand curve:1) Number of buyers2) Tastes and preferences3) Income of the consumers4) Purchasing Power Parity5) Change in Fuel Prices6) Change in Financing Options7) After sales servicing cost8) Availability of spare parts9) Lack of Infrastructure Facilities like Roads, etc.10) Price of substitutes or complements11) Expectation of future prices

Shift in demand curve due to rising fuel price:

As we know that when the fuel prices increases the sales of premium vehicles decreases as fuel prices and cars are complementary goods.In case of complementary goods the the price of one product affects the demand of other complementary good.So there has to be a proper decision in the price of complementary goods.

Fuel prices (Petrol in Rs) Sales of cars45 12000047 11500049 11200052 110000

We can see from the table that increase in the prices of the petrol decreased the sales of car.

Here the demand curve shifts backwards as the fuel price increases.Fuel price is a non price factor so there is no movement along the demand curve but there is a shift in demand curve.As the price of fuel increases from 45 to 47,47 to 49 and then 49 to 52 , the demand curve shifts to left (i.e backward).

Law of supply:

The law of supply states that the relationship between a goods price and the quantity supplied of the good is positive.Own –price changes cause movements along a given supply curve.The supply of cars e.g Honda city is dependent on certain factors.

The supply function for X:

Where:

X’s=Quantity supplied

Px=x’s price

Prop=prices of factors of production

Poc=opportunity costs(alternatives in production)

S&t=science and technology

R=price of raw material like steel,tyre,plastics for making dashboards,etc.

N=number of firms in the market

Equlibrium analysis:

Due to natural calamity in 2006 (Tsunami and shutting down of Chennai plant) the major Honda automobile part manufacturers were shut down and due to this the supply reduced and consequently according to law of supply the cost reduced and the quantity demanded exceeded the quantity the Honda could supply to consumers.

Cross elasticity of demand of automobiles:

Cross elasticity of demand measures the responsiveness of quantity demanded to the change in price of other goods.This is often considered when looking at relative changes in demand when studying complement and substitute goods.

Honda Siel cars India Limited (2011)

Month Total quantity sold(In Thousands)

Total quantity demanded(In Thousands)

Total prices charged

Januray 3.22 3.50 2.5February 3.04 3.25 2.4

Maruti Suzuki limited (2011):

Month Total quantity sold(In Thousands)

Total quantity demanded( In Thousands)

Total price charged( In Thousands)

January 45.63 53.64 22.8February 47.93 51.87 23.9

Cross elasticity of demand for Honda:-

*A percentage change in the price of maruti car shall lead to a percentage change in the demand for the Honda city car.

*Also a percentage change in the price of substitute good such another segment car or a light motor vehicle or any other mode of transport shall also lead to a percentage change in the demand for the Honda city.

For e.g if the price of using public transport is Rs 10 a day and it further reduces to Rs 5,then demand for Honda city may go down as the per day usage for this car is Rs 15.

Production Function:

Production Function can be defined as a function that relates the factor inputs and outputs.  The production function can be used to obtain the maximum possible output that can be produced with a given set of inputs. The production function also represents the technology of the firm or industry or the economy as a whole.

A single production function contains two variable inputs, Quantity (Q) and Labor (L) and one or more fixed inputs in order to produce a single output.

The production function can be represented as

F = f (L, Q)

The two assumption associated with production function are

The technology employed by the firm does not change. (Change in technology leads to change in production function)

The output can be increased by increasing the input.

Total Cost Curve:

Total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and

include inputs (capital) that cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs.

The rate at which total cost changes as the amount produced changes is called marginal cost. This is also known as the marginal unit variable cost.

If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis developed and used in cost accounting by the accountants, then total cost is linear in volume, and given by: total cost = fixed costs + unit variable cost * amount.

The total cost of producing a specific level of output is the cost of all the factors of input used. Conventionally economist use models with two inputs capital, K. and labor, L. Capital is assumed to be the fixed input meaning that the amount of capital used does not vary with the level of production. The rental price per unit of capital is denoted r. Thus the total fixed costs equal Kr. Labor is the variable input meaning that the amount of labor used varies with the level of output. In fact in the short run the only way to vary output is by varying the amount of the variable input. Labor is denoted L and per unit cost or wage rate is denoted w so the total variable costs is Lw. Consequently total cost is fixed costs (FC) plus variable cost (VC) or TC = FC + VC