According to the article that I have found, the car sales in Europe are declining

steeply in October. Spain and Ireland are affected badly, their sales has declined 40% and

54.6% respectively due to the financial and economic crisis. Economic crisis is when

the real output is falling, which cause demand to fall. The significant fall in demand,

the quantity of a good and service that consumer are willing and able to purchase at

a given price in a given time period, is mainly due to the financial and economic

conditions in EU. It has affected the market of cars in Europe and is believed to continue

in 2009.
 In the Europe car market 2008, the demand curve shift to the left, from D1 to D2.

This cause the decrease in quantity demanded from Q1 to Q2 and fall in price from P1 to

P2. As there is an economic and financial crisis in EU, the economic growth is falling.

Economic growth will lead to a fall in output of the country, an increase in the

unemployment rate, which caused most people to have lesser income.

The elasticity of demand is a measure of how much the demand for a product

changes when there is a change in one of the factors that determines it. Income

elasticity of demand is a measure of how much the demand for a product changes when

there is a change in the consumer’s income. For normal goods, the value of YED is

positive hence it is income-elastic. Cars are normal goods, meaning as the income rise

so does the demand, and as the income fall so does the demand fall. Not to forget that

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cars are luxury goods, it is considered as humans’ wants, and not needs. So people might

reconsider whether car is a necessary goods before buying it.

As it is stated in the article, “manufacturers are temporarily halting production at

some plants to cut their costs.” It is a solution made by the car company, which is to halt

production by reducing supply. Supply is the willingness and ability of producers to

produce a quantity of a good or service at a given price in a given period of time.

This is made by Car Company to anticipate the fall of total revenue due to the fall in

demand as well as to minimize their loss. From the law of supply says that whenever the

price decreases so does its quantity of goods supply and vice versa. The main aim for the

car company in EU in halting their price is to reduce their cost of production, but there is

much more on its long term result.

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 The halting of production does decrease the production; but on the other hand it

also increases the price of the car. In the graph above, the supply shift to the left from S1

to S2 hence resulting in a small increase in price, which is from P1 to P2. Recapping that

cars are elastic goods, a small increase in its price can lead to a big fall in its demand, as

shown in the graph above from Q1 to Q2. In that situation, the TR of the car company

will once again fall, as the gain is lesser than the loss. The solution made by the car

industry in Europe, which is to halt production will not help the Economy in the Europe.

The decrease in supply will cause and increase in price. As the price increase, it will be

less affordable which cause a further decrease in demand. The car company may hence

face bankruptcy and have to lay off their workers. Furthermore, in result of laying off

workers, unemployment rate will increase and this will worsen the economic crisis.

It would be hard to make solution for the global economic crisis that has caused

the fall in income, so it is easier to make actions to gain the customers’ interest on the

cars in Europe. Advertising may gain back the interest of the public. Though it may

increase the demand for cars in EU, it would not be a big increase in the demand as the

economic crisis is still on. The amount of people who are unemployed are still big and

the income of the people are still not constant. So due to the global economic crisis, the

demand of the cars would not have a big shift.