The article talks about the launching of the cheapest car ($2500 U.S only) in the world by Tata Motors, by the name “Nano”. In this commentary I will analyze its effects on demand1, supply2, externalities3 and price4.
According to the law of demand5 ceteris paribus6, the launch of Nano in to the car market in India is expected to create a huge increase in demand because the lower middle class will start buying this car. An increase in demand will lead to a shift of the original demand curve7 (D) to the right (D’) (refer figure 1).Nano marketThe increase in demand will attract Tata (the producer8) to produce more of this car. Therefore, the supply of Nano will increase, leading to a shift of the original supply curve9(S) down to the right(S’). These shifts in demand and supply curve will lead to a change in equilibrium10 point (E) of the Tata Nano market. The new equilibrium point (E’) will have a greater quantity traded between consumers11 and producers. The price of Tata Nano will fairly remain constant or undetermined.The second cheapest car in the world costs twice as much as this car.
As a result of this shocking price, it will have both positive as well as negative externalities. It will have a positive effect on Indian people (making cars accessible at all social levels), on policy makers, on Indian oil corporations and the suppliers of raw materials. More cars on Indian roads in the near future creating traffic problems can be seen as negative effect, along with increase in health expenditure.
The price of the Tata Nano being unique for cars makes it hard to decide what a substitute for this car is. Other car companies in India like Hyundai, Suzuki, Toyota and Chevrolet will suffer with the launch of “Nano” as the demand for their cars will decrease. In order to remain in the market, also called Buyers market12, these companies will reduce their current car prices and will try to introduce cheaper vehicles. This will lead to increase in its supply. The demand for two wheelers in India will decrease, as people will prefer buying “Tata Nano” by paying a little more.Petrol being the strongest compliment13 of cars will become extremely costly as the demand for it will increase but as supply is pretty much constant or it will decrease with time because petrol is a scarce fossil fuel.
The changes in the petrol market are shown in figure 2. The car market has a very elastic14 demand. Therefore, Tata Company needs to sell this car at the same price because if they increase the price it will lead to decrease in demand.The release of this car will not only create a revolution of mobility in India, but it will also have a huge effect on the world car market. Unfortunately, it will make petrol scarcer and increase the content of carbon dioxide in the environment.This car will give millions of Indians an opportunity to take part in India’s strong economic growth by increasing their standards and quality of living.
Therefore, the gross domestic product 15(GDP) of India is also expected to increase with the launch of this car. In conclusion, it can be predicted that in developing countries like India, Mexico, China and many others; cars will not be viewed as “Veblen”16 goods anymore but will soon be considered bare necessities.1 Amount people are prepared to buy under specific circumstances such as the products price2 Amount that firms are prepared to sell under specified circumstances3 Third party effects arising from production and/or consumption of goods4 Value of a substance5 Negative relationship between the price of a good and the quantity demanded6 Everything else remaining the same7 Willingness to pay8 People who make and sell the good9 Willingness to accept10 Point where the demand and supply curve meets11 People who buy the good12 Consumer dominated market13 Two goods related such that demand for one falls when the price of other increases14Quantity demanded is very responsive to change in price15 Sum of personal consumption expenditures, government purchases of goods and services, investment expenditures, and net exports16 Expensive and luxurious goods which are bought by rich people