Germany’s Auto Sector Faces Crisis

Good Job! - Cheaper Chinese cars has decreased the demand for German cars and shifted the demand curve leftward. At the original price, there is a surplus of German cars (the quantity supplied exceeds quantity demanded) and sellers of German made cars cut their prices until the new market equilibrium is reached.

Well Done! - The labor market is in equilibrium when value of the marginal product of labor (price of output multiplied by marginal product of labor) equals the wage rate. As prices of cars fall, the value of marginal product of labor falls below the wage rate, compelling firms to lay off workers. A leftward shift in the labor demand curve would bring a fall in equilibrium quantity of labor. A surplus of labor (labor supply in excess of labor demand) would cause the wage rate to fall.