The diagram below shows what VAT is. VAT stands for value added tax and is on almost everything an average everyday consumer buys. VAT is a consumption tax and only the consumer on the end of the production chain has to pay this. It can also be considered that it is a indirect.
Below the graph shows how VAT effects the price of products. The supply line labeled Supply shows what the price would be without VAT and the line with Supply + VAT shows the real price. Depending on the price of a certain good the tax will be higher since VAT is a percentage tax it is not a flat rate tax. VAT is equal to a percent of the real price of the product. E.G. the VAT in England is 20%, lets say that a bottle of water distilled in diamonds costs 100 pounds without VAT, with VAT it will cost 120 pounds. This can effect the inflation since the prices of products rise the inflation will rise.
2) Why are car sales expected to fall in the UK over the coming year? Given this expected trend, what might we expect to see in terms of car prices?
The sales of cars in the UK are supposed to drop as most of the articles from January 2011 said. This is due to the rising tax in 2011 from 15% VAT to 20%VAT. This reduces demand for cars since the prices is higher for an average consumer. Another reason why the sales are expected to go down, is that the scarppage scheme is over, people have bought cars during the scrappage scheme since it was cheaper to turn in their old car and get a new one.
3) What impact might rising petrol prices have on new car purchases? What figure would you expect to see for cross elasticity of demand?
Due to rising petrol prices, the demand for small and efficient cars will rise, and the demand for big gas guzzling SUVs will fall. The elasticity of demand will probably be under 1 since people will have the choice to start using public transport and reduce usage of private cars.
4) How might the expected decline in car sales affect the UK economy over the next 12 months?
The decline in the cars sales always effect the economy in a bad way. Since cars have a lot of expensive complementary goods. A decline in sales will lead to companies having lower profit therefore having to reduce costs by making workers redundant. Making workers redundant will increase the unemployment this leading people to not having money to spend on good. As you can see all this is just a huge chain of collapse.
5) What type of market structure is the car industry? (Think about the characteristics of
monopolistic competition and oligopoly.)
The car industry is competitive as well as oligopoly. There is much competition of the market when it comes to cars, although the biggest companies are owned by a few major holdings. An example of this is the Volkswagen group which owns about half the european cars including Audi, Bugatti, Bentley, and Lamborghini. So I cant not exactly decided between one or another, they are a close call. GMC is also a huge holding group which is the owner of many big brands, although due to its financial problems lately it has not been so competitive as European or Asian cars.
6) How did the car scrappage scheme help car sales?
Thanks to the car scrappage scheme, people who turned their old car in received 2000 pounds for a new car. Half of the return came from the car producer and the second half from the government. This was great because it encouraged people to start buying cars, to boost the car sales. Since 2010 was considered a hard time for car industry it was a very smart move.
7) What might explain the different trend seen in the German car industry?
The different trend seen in the German car industry is very obscure, although my opinion is that it is due to that the Germans produce some of the best cars. These cars have higher demand than French or Spanish cars. As well as thanks to the Scrappage Scheme in the UK people bought probably a lot of German cars. Thanks to smaller market shares of the other countries Germany managed to increase its market shares and sales. Someone always wins, even if in the worst situation.
What do you think?
Erlach
