Austin Bagley

CSU ID#: 828-790-229

AREC202-Prof. Kroll

As we are all aware, the tsunami that struck Japan caused a horrific number of casualties and billions in damages. Among the industries affected by this catastrophe is the Japanese automobile market. In particular, Honda has declared that its numerous dealerships will be facing shortages of such products as the Honda Civic. Honda has taken action by greatly reducing production of the 2012 Civic as well as delaying the release of the 2012 CR-V by at least a month. As well, Honda will continue to produce its 2011 models later into the year. Also in a sidebar, automobile electronics suppliers are scrambling to increasing production and build new factories. These actions can be analyzed and justified by a few economic principles: laws of supply and demand, average cost curves, and long-run equilibrium. First, the shortage Honda is facing can be understood once viewed through the economics behind supply and demand. The tsunami has damaged factories that create many of the sensors and other electronics needed for automobile manufacturing. Thus, the supply of electronics has decreased and graphically has been shifted to the left. Consequently, the supply curve of Honda automobiles has shifted graphically to the left since the factor of input prices has increased. With demand increasing for Honda as stated in the article, this has caused the demand curve to graphically shift to the right. Since the demand curve shifted to the right and supply curve shifted to the left, the laws of supply and demand stipulate the equilibrium price will increase. However until the market has enough time and upwards pressure,

Austin Bagley

CSU ID#: 828-790-229

AREC202-Prof. Kroll

there will be excess demand for Hondas and thus a shortage will be incurred. Also now that the price of input prices have gone up, the average total cost curve has graphically shifted upwards. Facing a shortage and increased total costs, Honda has had to take economic austerity measures to weather out these hard times since the tsunami. For example, Honda has postponed the release of the 2012 CR-V because the upwards shift in the average variable cost curve has caused the shut-down price to be reached. As such, Honda is ceasing production of the 2012 CR-V until the average variable cost curve shifts down and the market equilibrium price is above the shut-down price. Also, Honda has decided to continue selling its 2011 models later into the year in order to maintain a quantity supply in order to keep a steady revenue stream through the demand for Hondas while the shortage causes the market to come to equilibrium. Though this disaster has cause many economic problems for Honda, their suppliers of electronics are using this scenario to their advantage. The electronic suppliers of Honda and other automobile maufactures are using the increased demand for their products to justify the need to set up additional factories. They are using marginal analysis to show that in the long run, at the companys current quantity of production, the average total cost can be reduced by building more factories as the cost. So with more factories and a higher quantity of production, a shortage similar to the one incurred with Honda can be avoided. This is in the best interest of everyone since the market is most efficient at equilibrium. For since the electronic suppliers have a larger marginal benefit than marginal cost of

Austin Bagley

CSU ID#: 828-790-229

AREC202-Prof. Kroll

increasing the quantity of production, they are currently experiencing economies of scale and, by increasing the number of factories, can be more efficient.