1528735 BS2560

Managerial Economics Course work

A)
This answer will aim to provide an overview of the key factors influencing the demand of the
Vauxhall Astra. Like any good there are many factors driving demand however this section will focus
on what is believe to be some of the more significant demand factors affecting the Astra being shifts
in consumer taste, auto financing and fleet and business registrations.

Let us first consider the changes in consumer taste, there has been significant shifts in the types of
cars being purchased over the last decade with most notability being the rise of the SUV and SUV
cross-over. In the late 2000s SUVs made up a small fraction of the car market with compact cars
being by far the most popular however in an report by (Dawson, 2015) that shows that the SUV
became the most popular car with “with a 22.5% share” while “the compact car category fell
20.6%”. It is necessary to define that the Astra is within the ‘compact car’ category and therefore
these significant changes in consumer taste mentioned have hit the Astra hard as consumers are
moving to other substitutes with in the market. These trends are expected to continue as SUVs
become more fuel efficient and affordable.

Moving now to access the influence of financing, there has been a significant increase in financing to
purchase new cars with “almost 85% of all new car sales being backed by auto finance” (Kaltan,
2016). This has created a dependence on the supply of credit for the new car market and most
notability affecting the affordable car market. The report by Kaltan would suggest that the Astra
demand is particularity exposed to changes in the credit market, if a reduction in the supply of credit
were to occur similar to the post 2008 financial crises it would be likely that consumers would be
unable to afford to purchases new Astras without credit. This there forth suggested a significant link
the between the availability and price of financing with the demand for Astra’s.

Turning to assess the fleet and business segment, it makes a significant part being 55% of the
market. The Vauxhall Astra has historically been a large contributor to this segment having
previously made up “34% of models in 2014” (BVRLA, 2014). The evidence proposed by the BVRLA
would imply that it’s a huge part of the Astra’s sales and has been suggested to be largely
responsible to its success. It can then be suggested that changes in demand for corporate cars are
inevitably going to have an effect on the demand for the Astra, this can be supported by the recent
fall in Astra sells by 22% in 2016 (Campbell, 2017) along with the 7.8% fall in fleet registrations
(Legett, 2017).

To conclude, It’s important to note that all though recent year on year registrations have fallen more
car than ever are being registered and sold. From the analysis mentioned above it can be inferred
that the Astra is losing market share to competitors rather than the market as a whole going in to
significant long term decline.
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b)

In the following answer the possible methods and data that could be used to forecast will be
critically evaluated by firstly, introducing the two main categories of forecasting and explain some
example of methodology, secondly to access which data source would be most effective.

The following part goes on to describe the methodology of quantitative forecasting. Having
researched the historical development of car forecasting from simple secular linear trend models
that (Carlson & Umble, 1980) developed and the seasonally adjusted model that (Garcia-Ferrer,
1997) developed, it became clear that for forecasting application to the Astra that segmentation of
the compact car market and the use seasonality to when consumers replace the old cars would be
useful additions to the model. Today econometric models have proven to be most accurate and it
would indeed be my choice of method, however its accuracy is most dependent on the choice of
input data and variables, which will be discussed later. A viable alternative was proposed by (Sinha,
2012) who created a model using an artificial neuron network (artificial intelligence) who used price,
income, consumer awareness, inflation and fuel costs as variables. The historical data was then ran
through a supervised network (MLP) to allow the inputs to be mapped to the know output (a
learning process around correlation and significance). This was then used to forecast an output
(demand) when it was unknown to recent data, this created a particular accurate model with a MSE
= 7.7728e-006.

Briefly summarising the most common qualitative method being consumer surveys, which are often
used when forecasting the demand of durable goods and have shown to be effective in the
automobile market. This is due to the fact that durable goods tend to be in the consumers life span
for longer and they require more thought before purchase so it’s easy for consumer to represent
their thoughts on a these good on survey.

The following part of the question moves on to describe in detail the choice of data in the
forecasting model proposed.

Firstly this part will briefly overview the more trivial data that should be included. Price and
advertising expenditure are key determinates of the demand of a good, due to the nature of the
laws of demand and so any relative changes should be included in the model.
Disposable income is an important factor for the consumers decision process and so GDP and
personal income are good indicators to be used.
New car registrations is an important indicator to the car markets overall performance and from this
previous assessments it would advisable to weight this slightly more to sub-category of compact car
registrations and fleet registrations.
The price of petrol and often the running cost of any durable good is often considered and with
prices expected to rise over the next 10 year this could become an important factor and should be
included.
In addition to the points made previously, an interesting paper by (Jansson, 1986) introduces the
idea of entry and exit propensity compared to age which focuses on the development of car
ownership as we age. Jansson ideas may becoming increasingly relevant with increasing young
immigration and an ageing population, therefore the use of entry and exit propensity alongside
population growth and immigration would like yield more accurate results to the demand of the car
market as a whole and there-forth Astra’s.
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c)

Before proceeding to examine the impact of the job loses, it’s important to explain the link between
changes in final demand and the direct effects on the firm to provide context to the inter
dependence of input-output analysis. As the demand for Vauxhalls cars has fallen this has led to the
management to response by reducing its output and directly laying-off 250 of its works and with the
threat of closing all production to all jobs at Ellesmere Port (Campbell, 2017).

Subsequently the use of input-output analysis allows us to focus on the insights from the indirect
and induced effects of Vauxhall reducing its output, giving a strong mathematic understanding of
scale of the effects as output is reduced.

Turning to the indirect effects, input-output analysis is useful as it can systematically traces the
transactions and contributions that go in to producing a good and can allow a clear assessment of
the backwards and forwards implications due to changes in output.

In the case of Vauxhall, who will have many suppliers both domestically and foreign for raw material
such as steel, glass, copper and services such as cleaning and accounting. Using steel as an example
as it is one of the largest components of the Astra (Automotive , 2016), it is likely to be sourced
domestically from firms such as Tata. The knock on effect for less orders is likely to also causes firms
such as Tata who employ nearly over 8000 workers (Pinto, 2012), to reduced output and potentially
lay-off its own workers. A similarly analysis can be made on the forward supply chain, such as
business who use Vauxhall cars as part of their services may be dependent on Vauxhall to fulfil their
business such as specialised Vauxhall garages and taxis.

The extent in which the regional economy is effected by is dependent on how integrated Vauxhall
are to the regional economy, from my assessment it is clear that most job loses will mostly occur
directly and from suppliers as most Vauxhall are exported and so the forward extent is unlikely to be
as server on the UK economy.

Now focusing on the induced effects where the effects of the lay-offs are likely to be largest. An
important concept to the input-output analysis is the flow of transactions, nearly 50% of Astra’s
(Produced in UK) are exported. This generates an inflow of ‘New Pounds’ in to the UK that are then
paid through dividends or in wages, which is often spent in the local economy supporting local
businesses multiple times. These transactions creates what is known as an multiplier effect from the
sale of a car (final demand) to purchases from wages. Therefore, it can be suggested that economic
impact of the 250 workers who have been layed-off stretches far wider than just the value of their
wages and can be demonstrate with Input-Output analysis.

An important sub part to this case of Vauxhall is the level of income distribution and job creation it
brings to the UK. Vauxhall’s factory in Ellesmere port proportionately employed a large part of low-
income workers, which supported a relatively efficient form of income distribution as deprived parts
of the country received a health economic inflow opposed to if the factory was located outside of
London or even outside the country.
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d)

This section will aim to examine some of the key limitations of Input-Output analysis based around it
accuracy as a model. The main focal point of my analysis being based around the assumptions that
the model makes. These assumption are useful for simplification however at an application it misses
some key issues.

Before proceeding to examine the implication of economies of scales, it’s important to define that
the model assumes linear production functions and fixed coefficients which is a bold assumption
that opposes most modern economic models. This assumption leads to suggest that in this case of
Vauxhall the first reduction in output of cars would lead to an equal reduction in the input factors
such as labour and materials as it would for a final reduction in output and so it assumes scale
invariance (Avonds, 2007). Before turning to assess the implications for this limitations it’s important
to note that this assumption holds for all firms in the regional model.

In the case of Vauxhall and their competitors their entire business model is based upon the
advantages of economies of scales and so a large output reduction as discussed previously is likely to
causes a more significant rise in unit costs. Input-Output analysis fails to account that the scale back
is likely to have a larger effects on their orders for Vauxhalls suppliers as they lose the benefits of
economies of scale.

As far as Input-Output analysis is concerned it ignores any implications of cyclical effects or

consumer confidence. Firstly it’s important to note that Input-Output analysis only focus on the
mechanisms and transaction of the economic region but fails to explain any causes of the changes in
final demand such as economic or political shocks. Brexit has been speculated to play a part in the
decision to reduce output at Ellesmere port (Campbell, 2017) and has caused investment to be held
until the uncertainty passes, this in conjunction with the lack of consumer confidence are possible
factors for causes of the demand fall. To evaluate this as a limitation it’s important to take in to
account that the lack out time scale that Input-Output analysis gives, as it only presents a current
snapshot of the economy. The current effects of Brexit’s uncertainty are most probably to
temporary and so the final demand may return to normal and would there forth imply that any
temporary shocks that can be greatly over estimated by Input-Output analysis.

Moving now to consider the implications of capacity changes, a key assumption of Input-Output is
that firms are not bound by the constraint of full capacity or rigidity in changes of output. In the case
of Vauxhall and their suppliers, reducing the size of their labour force is not easy task with tight
regulation and there forth the fall in final demand would only occur for long-term demand issues. As
a result suppliers may choose to absorbed the fall in revenue rather than lay-off its works,
particularly if they are already operating at full capacity. Alternatively if redundancy’s are given this
would suggest that a fall in output may increases the induced wage effects in the short run. As a
result Input-Output assumes an instantaneous linear progression but in reality the events are likely
to be lagged.
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