Germany’s Auto Sector Faces Crisis

EconEye Admin

1 year ago

Bosch plans 5,550 job cuts as Germany’s auto sector struggles with weak demand and rising competition from cheaper Chinese rivals. Volkswagen plans to close plants in Germany, while Mercedes faces a plunge in earnings.-reuters.com, November 22, 2024

Answer the following questions to check your understanding of the story.

How has competition from cheaper Chinese rivals influenced the Germany's auto market?

Increasing competition from cheaper Chinese rivals has ___________.

a) decreased the demand for German cars, bringing a fall in prices

b) increased the demand for German cars, bringing a rise in prices

c) decreased the supply for German cars, bringing a rise in prices

d) increased the supply for German cars, bringing a fall in prices

Wrong! - Cheaper Chinese cars decrease the demand for German cars. Given the current market supply, does a shortage or a surplus of German cars arise? How do sellers of German cars adjust their prices? Supply might change in the future but not initially.

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.

How will a fall in car prices driven by weaker demand influence the labor market in German's auto market?

A fall in car prices will ____________.

a) decrease the supply of labor, which increases the demand for labor, the equilibrium quantity of labor, and the wage rate

b) decrease the marginal product of labor, which decreases the demand for labor, the equilibrium quantity of labor, and the wage rate

c) decrease the value of marginal product of labor, which decreases the demand for labor, the equilibrium quantity of labor, and the wage rate

d) increase the value of marginal product of labor, which increases the demand for labor, the equilibrium quantity of labor, and the wage rate

Wrong! - 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, how does the value of marginal product of labor change? How do firms change their demand for labor? What happens to the wage rate and the quantity of labor employed?

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.

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