Tesla has announced price cuts for the second time this year in a renewed bid to outprice competitors and stimulate demand.
Certain models have had their price slashed by 5-10%. This follows even higher cuts of up to 20% for some new models earlier in the year. According to one analyst, price reductions in January led to a 30% boost in sales.
With demand for EVs slowing down, manufacturers are using price as a weapon to attract consumers. In response to Tesla’s earlier cuts, Ford responded with a price reduction of their own. What firms will want to avoid though is a race to the bottom. Price wars can be lethal, but Tesla hold a strong position as their cars, already priced higher than most competitors, have a large profit margin for which they are able to squeeze. That being said, lower profits won’t please shareholders!
THINK LIKE AN ECONOMIST!
Q1. Explain how this article relates to the Law of Demand.
Q2. Using an appropriate diagram, explain the impact of reducing prices on sales.
Q3. With reference to the article, are Tesla cars likely to be price elastic or inelastic in demand?
Q4. Besides price, analyse two other ways that firms can compete in a competitive market like the automobile industry.
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