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Tesla Motors, Inc. is a forerunner in the field of all-electric cars. The firm hopes to achieve success with its latest technological breakthrough in the automotive industry, so it has invested aggressively in technology, incurring massive development costs. However, the latest technology seems to be cutting-edge in the industry, allowing Tesla Motors, Inc. to enjoy a larger market share. Notably, the business has thrived, and it is now at the top of the industry ladder. The business has focused heavily on revolutionizing the industry by providing eco-friendly fuel economy vehicles that do not sacrifice convenience, luxury, or even efficiency.
A primary strategy of the company centers on technology and product development.
Keywords: home energy, technology, electric vehicles, fuel, economy.
Tesla Motors, Inc. Microeconomic Analysis
This paper aims at carrying out a micro economic analysis of Tesla Company, which is an all-electric vehicle producer company that began in the US and expanded globally. Different microeconomic variables will be analyzed including the demand and supply, the market share of the company, the cost of production and the market structure. The paper will evaluate demand over time and discuss the factors that influence the demand and supply of Tesla electric cars. The price elasticity of demand for the Tesla cars will also be analyzed, and this will be done using the kinked demand curve because it operates in an oligopoly market. Evaluation of the cost of production will involve analysis of both direct and indirect costs that the firm incurs in its production process. After an in-depth microeconomic analysis, the paper will make recommendations on ways, in which the company can improve regarding competition and any other factors, which could hinder its strategic objective to succeed. The all-electric car market is still in the early stages of development, and other producers are slowly getting into the market. However, Tesla will always remain to be stand out a head in competitions due to its technological inventions and for having the pioneer of the product..
History of Tesla Motors, Inc. Company
The company was founded in 2003 by the Silicon Valley engineers group. This group wanted to prove to the market that electric car is best compared to the gasoline cars. Its mission when it was established stated “to accelerate the world’s transition to sustainable energy” (Johnson, 2011). The engineers initially designed a power train for a sports car utilizing an Alternating Current induction motor patented by Nikola Tesla in 1888 (Johnson, 2011). The company develops, designs and sells electric vehicles and stationary energy storage products in the US, Norway, China and even internationally. The name Tesla Motors, Inc. was founded by the famous engineer investors and it also offers components of electric vehicle power train. The company sells its products through networks of its galleries and stores along with the use of internet for marketing. The launch of “The Roadster” in 2008 comprised of a range of 245 miles per charge (Carlson & Robertson, 2014). Tesla Motors, Inc. sold over 2,400 Roadster in over 30 nations in 2014. Carlson & Robertson (2014) report that the roadster is now on the road acceleration from “0 to 60 mph in 3.7 seconds”, and this gains a range of 245 miles per charge in its lithium ion battery. Through this fact, the company has set a new standard for electric mobility. In 2012, the company launched model S which ended being the world first premium electric built from the ground to be 100% electrical. Additionally, the launch of Model X was also a notable product from the company.
Demand and Supply Analysis
The law of demand states that the price and the quantity demanded have an inverse relationship. An increase in the price leads to a reduction in the quantity demand. The demand for Tesla product follows this rule. When the price of the product increases, the demand decreases; and with the price decrease, the demand increases. Since its establishment, the company has registered improved demand trends. The sale of its model S has been on the rise and brought the company revenue. The company has taken positive steps in its operations to realize the best market performance along with registering improvement in its demand. Tesla Motors, Inc. has focused on the need to produce the best quality in all-electric vehicles that are appealing to the market to gain customers and remain competitive. Its demand is explained below on the Figure 1.
Q All-electric Vehicles
Figure 1. Demand and Supply Curve for Tesla Motors, Inc.
All-Electric Vehicles Output
The profit maximizing level output for the company is determined through forces of demand and supply. The company is willing to sell more of its product to the market when the prices of the electric vehicle rise. On the other hand, the consumers of the product will be willing to buy more Tesla Motors, Inc. products if it reduces the price. Equilibrium is thus attained at points P and Q respectively. Changes in the price affect the demand of the product resulting into movement along the demand and the supply curves as illustrated in the Figure 2 below.
Q1 Q0 Q2 All-electric vehicles
Figure 2. Changes in quantity as a result of changes in the Price of all-electric vehicles
Before the price increase, the market is at equilibrium with quantity Q0 and price P0. Price increase leads to changes in the equilibrium quality demanded by the consumers and the quantity supplied by the company. The forces of demand and supply will create a new equilibrium level in the market industry after any disturbance.
Factors Affecting the Demand and Supply
Various factors affect the demand for the all-electric vehicles manufactured by Tesla Company. The availability of close substitutes from the other types of motor vehicles is a major challenge. Variations in the prices of these motor vehicles affect the demand for the company. Additionally, change in the income of the consumers is also a major factor that affects the demand for the Motor company product. If the income increases, the consumer will have more disposable income and manage to buy the vehicle. However, a decrease in the income of the consumer reduces the demand for the product. The taste and preferences of the consumer have an impact of either increasing or decreasing the demand of the product (Jackson et al., 2008). Tesla implemented a new technological product in the economy. The taste and preferences of the consumers trying the new model have significantly seen improved profit of the company. Additionally, time and changes in the population and demography have an influence on the demand for the product. Population increase makes the company sell more products and thus increasing the demand. Also, future expectations in the price increase will make the consumer buy more of the product now and thus lead to an increase in the demand. On the other hand, if the prices of the vehicles are expected to decrease in future, the demand will decrease as people know that they will be able to buy the product at a lower price in future, and thus save.
The supply of the company’s product depends on the input costs, the technological improvement, the price of the substitutes, and the number of firms in the market together with future expectation in the price of the product. If the seller expects the product to increase in future, the company will reduce the supply now in order to make more profits in future. An industry characterized by many firms the supply is reduced due to a high number of competitors. Close substitutes also decrease the supply and an increase in the price of the inputs decrease the supply.
Price Elasticity of Demand
The price elasticity of demand refers to the degree of responsiveness of the quantity demanded to the changes in the price of a product. All electric vehicles is a normal good and thus depicts elastic demand. Here, a unit change in the price of the product has a more that one unit impact on the demand for the product. Passage of time, availability of close substitutes, and share of budget affect the elastic o demand. Besides, the elasticity of demand will depend whether the product is a necessity for a luxury. For a luxury product, the demand curve is inelastic while for necessity product the demand curve is elastic. The graph on the Figure 3 below shows the kinked demand curve of the company.
Figure 3. Kinked Demand Curve for Tesla Motors, Inc.
Tesla Motors, Inc. is characterized by kinked demand curve. In Section A, a rise in the price of the product of the electric vehicle could make many customers switch to relatively lower priced vehicles from the other manufactures. The substitution effect makes the demand in this area to be relatively elastic above the kink. Therefore, the Tesla firm could lose its maker share at this point. On the other hand, in Section B, decreases in the price of the vehicle will also prompt the other seller to decrease the prices. The cut in the prices could switch the customers from not buying electric vehicles. The demand is relatively in elastic at this point because the decrease in the price will not be proportional to the increase in demand. This is because the other consumers will shift into buying the other product that has also decreased in price.
Cost of Production
The company incurs direct and indirect costs of production. The direct costs of production include costs of raw material, labor costs, the administration expenses, and cost of depreciation. The direct costs are divided into variable costs and fixed costs. Fixed costs are those costs m which do not vary with variations in the output level. An example includes rental cost. On the other hand, the variable costs of the company vary with variations in the amount of output, and this includes costs of raw materials, the labor cost and the cost of procurement. The Company also involves inventory evaluations to determine its costs in purchasing. Tax is another direct cost that the company incurs. The indirect costs are the costs of production that do not have a direct impact on the production process of Tesla Motors, Inc. Company. For example, The Company incurs training costs as an indirect cost.
The trends in the costs of production for Tesla Company have been steadily increasing with an increase since its establishment in 2003. Over the years, the company has been registering an increase in its production costs due to the increased level of output and the use of technology that is capital intensive. The cost of production has an impact on the amount of revenue made by the company. When the cost of production is high, the level of profits reduces. The company also undergoes restructuring processes that also led to efficiency and resulted in a decrease in the cost of production. These moves to cut on the costs of production have a significant role in increasing the level of profit for the company. The maximum output level is shown in the Figure 4 below. Output level depends on the marginal cost, average total cost and the demand of the product.
Marginal Cost (MC)
Marginal Revenue (MR) Market Demand (D)
Figure 4. Maximizing level of output for Tesla Motors, Inc.
The graph depicts the long run equilibrium level of Tesla Company. The equilibrium level is found through producing an output level of Q and at a price level of P1. At this point, the company has normal profits for its product. However, the Tesla Company operates in an oligopoly market, and it will charge a price of P2 in the market and result in the creation of abnormal profits. “In the long run equilibrium level, the marginal cost has to be rising, and it should be above the marginal revenue” (Doeden, 2015). The price level P2 is the maximizing profit level of price for Tesla and Q is the quality level of output that maximizes the profit level.
According to a report released by Carlson & Robertson, the automobile industry is dominated by companies such as Ford and Toyota. However, Tesla Company dominates in the all-electric vehicles as it was the pioneer of the product. The market structure is oligopoly which is characterized by few firms that sell the homogenous product. The market also has high barriers to entry. The seller thus has influence over the market prices, and they can affect prices through limiting the product produced to create shortages. For a firm in this market to make decisions and actions, it has to consider the actions of the other competitors to arrive at an optimal choice strategy. This results in game theory which is a standard feature of the oligopoly market that helps the firms to maintain market share. The producers in this industry are interdependent, and firms face barriers of entry arising from high cost incurred to enter the market. The firms in this market are dependent on each other before they make any economic decision. It is, thus, characterized by kinked demand curve and game theory which guides the decisions of the firm basing on the decision made by the other firm.
Tesla is the dominant producer of all-electric cars and enjoys the largest market share. The current performance of the company is impressive. In the production of the Azines model, around 650 Model S vehicles were sold in 2016. 4,900 units of Azines were sold and in 2013, the model S became the top seller in the market. “Ahead of the Chevrolet Volt with 4,421 products, and the actual Nissan Leaf with 3,695” (Doeden, 2015). Model S also received the 2013 “Motor Tendency Car of the Year,” and the “World Green Car” honors. The company has 2000 staff in total.
Evidently, the company has continuously been developing new battery technologies which tend to be more affordable. However, the company has to invest more on research and development in the attempts of accelerating its development of model X and model S. more R&D in the gearbox, induction motor along with power electronics will make the company sell more of its products as this will improve the efficiency of the product. Analysis of the demand and supply trends reveals that the company has to enact measures that will enable it to continue enjoying dominance in the market. Due to the high competition faced from other firms in the market particularly from Ford and Toyota, the firm is at risk of losing its dominance if it does not enact measures to shield the company. Tesla has to concentrate more on customer feedback and incorporated the views of the customers into its strategic actions. Besides, it has to embrace an excellent customer service and build more on customer loyalty. In the quest to keep the market position, the firm has to identify new markets and target new customers and establish customer-centered strategies. This will not only help the firm in increasing its market share but also maintain the success of the firm.
For it to implement more and keep the brand name of the company, Tesla Motors, Inc. has to continue producing modern solution along with the encouragement of new vehicle invention which will end up attracting more customers. Besides, the company has to know that advertisement is a major factor in product promotion and through using the media, the company, the company will be known to the entire public and many people around the globe.
Tesla Motors, Inc. Company operates in the electric vehicle industry and employs high technology in manufacturing of its vehicle products which is a major technique used against its competitors. Tesla is classified as one of the innovative companies in the world. Notably, the company has managed to position itself in the industry through producing differentiate consumer vehicle products. The demand for its products is mainly influenced by the price of close substitutes and the income of the consumer together with the change in the price of the raw materials which impact on the product price. The firm works in the oligopolistic market, and thus its elasticity of demand is explained by the kinked demand curve. In oligopolistic market structure, the firms produce identical products and employ game theory, when making strategic decisions of the company. The objective of the company to create high-quality products has made it to gain global recognition and thus increased its sells. Many of the company’s brands have a good market reputation due to their high quality, and thus achieved a significant milestone in effectively competing with its rivals such as Toyota, VW, and Ford. However, Tesla Motors, Inc. has to aggregate the proposed recommendations in its strategic action plan for it to perform better and realize increased profits.
Carlson, W.B., & Robertson, A. (2014).Tesla: Inventor of the electrical age. Princeton: Princeton University Press.
Doeden, M. (2015). Space X and Tesla Motors engineer Elon Musk. Minneapolis: Lerner Classroom
Jackson, J., Mciver, R. and Wilson, E. (2008), Microeconomics. 9th ed. Australia: McGraw-Hill.
Johnson, D.D. (2011). International directory of company histories: Volume 124. Detroit: St. James Press.
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