2003-04
4C Patty and Julia
New Report
Description on the newspaper
As there is a growth in economy, people demand for brand name private cars (e.g. Benz, Bentley, Jaguar…etc.) increases. Recently, the BMW
Company had released a new BMW X3 deluxe car, it costs HK$500,000 each.
However, though the new cars have not arrived in Hong Kong, the company has already received 30 orders from the customers. Other brand name private cars like Bentley and Jaguar, although they are very expensive, people are still eager to buy them.
Explanation
What do private cars mean in economics?
Private cars are goods that can provide satisfaction or utility to at least one person. They are economic and consumer goods.
They are said to be economic good because they are insufficient to satisfy all people’s wants. More of them are preferred to less. People have to pay or give up something to get them. Also, there is a cost of production. On the other hand, they are said to be consumer good because they are goods produced for direct consumption. They give utility directly to consumers.
Why do people are so eager to buy them?
It is because people’s demand for brand name private cars increases when the car company release new line of them. Also, cars bring prestige.
(Demand refers to quantities of a good a person is willing and able to buy at given prices over a period of time, ceteris paribus. Also, it refers to wants supported by purchasing power and it is not a single quantity. It must be expressed over a period of time).
Therefore, it leads to an increase in both equilibrium price (P1--->P2) and equilibrium quantity (Q1--->Q2). If price remains at Pe, then quantity demanded is larger than quantity supplied, there is an excess demand for those brand name private cars.

Therefore, the car company may need to raise the price in order to reduce excess demand.
Will the increase in demand for brand name private cars lead to an increase in demand for other materials?
Since private cars and steel are derived demand. The demand for steel results from the demand for those brand name private cars. So when there is an increase in demand for private cars, it then leads to an increase in demand for steel, which is used in producing those private cars.
Factors causing an increase in demand for brand name private cars:
1. Average household income
When there is a growth in economy, it will lead an increase in income for people. Since private cars are normal goods, an increase in income may leads to increase in demand for them.
2. Tastes of consumers
Fashion and advertising affect the tastes of consumers, which will also affect the demand for private cars.
Demand for brand name private cars increases when it becomes fashionable to drive them.
Three types of production are involved in producing the brand name private cars
1. Primary production -all the productive activities that directly utilize natural

resources in production
In this case, Iron ore is extracted from the mine. This provides raw materials (iron) for producing the cars.
2. Secondary production - the process of turning raw materials into semi-finished goods and finished goods
In this case, the factory alloyed the iron into steel and it produces semi-finished goods (e.g. door of the car) and finished goods (e.g. the car).
3. Tertiary production - the provision of various kinds of services
In this case, the car company sells the cars to the public.
Which type of firm does the car company belong to?
Private enterprise.
Which type of business ownership does the car company belong to?
Limited company.
Advantages of limited company:
Limited liability: the shareholders have limited liability to the capital they have invested in the company. The risk is lower because their personal properties will not be used to pay off any further debt of the firm.
Wider source of capital: it can help to raise capital easily for the expansion of the firms because the low risk attracts investors to invest.
Shares easily transferable: shares can be bought and sold easily, therefore, investors can get back capital without loss.
Highly efficient management: it can afford to employ professionals who will run the firms efficiently.
A lasting continuity: the running of the limited company will not be affected if the shareholders die or withdraw.
Disadvantages of limited company:
Slow decision-making: any decisions have to be discussed in the Board of
Directors ’ meeting and so it slows down the process of decision-making.
Distant personal relationships: the shareholders ’ relationship with the employees and the customers will be distant as they do not have close contact with them, and thus, reduces the morale of the firm.

Complicated setting up procedures: it takes a long time and it is costly to set up a limited company.
Risk of speculation: Speculation in the stock market will cause a lot of fluctuations in the stock prices. If the stock prices falls a lot, shareholders will suffer a great loss.