TEL> Vol.4 No.7, August 2014

A Model of Manufacturers and Buyers of Cars over the Business Cycle Illustrating Competitive Manufacturing

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ABSTRACT

We illustrate competitive manufacturing with an original theoretical model of manufacturers and buyers of cars over a business cycle that have peak and off-peak demand periods. There are two types of plants manufacturing cars, plantK and plantL, each having linear total costs with absolute capacity limits. PlantK operates with low VC and high FC by being capital intensive. PlantK is output-rates rigid since it produces throughout the business cycle and always at capacity. PlantL operates with low FC and high VC by relying on outsourcing major components and parts. PlantL is output-rates flexible since it produces only in the peak-demand periods. We show results under SRMC pricing. Then we examine an alternate arrangement which increases demand irregularity. We show, under conditions of the model, that the added cost to supply irregular demand should be small because of the low FC of plantL. We show, under the conditions of the model, that the added gain in consumer surplus to have irregular demand supplied should be large because consumers will have more available for the peak periods. The main policy implication of this theoretical model—for regularly recurring cycles—is to urge focus, even in the off-peak periods, on adequate capacity for the peak periods.

Cite this paper

Aranoff, G. (2014) A Model of Manufacturers and Buyers of Cars over the Business Cycle Illustrating Competitive Manufacturing. Theoretical Economics Letters, 4, 558-567. doi: 10.4236/tel.2014.47070.

References

[1] Clark, J.M. (1923) Studies in the Economics of Overhead Costs. The University of Chicago Press, Chicago.
[2] KPMG (2012) A Comprehensive View of Australian manufacturing. November 2012, kpmg.com.au.
[3] Aranoff, G. (2011) Competitive Manufacturing with Fluctuating Demand and Diverse Technology: Mathematical Proofs and Illuminations on Industry Output-Flexibility. Economic Modelling, 28, 1441-1450. http://dx.doi.org/10.1016/j.econmod.2011.02.016
[4] Aranoff, G. (1991) John M. Clark’s Concept of Too Strong Competition and a Possible Case: The US Cement Industry. Eastern Economic Journal, 17, 45-60.

  
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