Economics commentary. 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 demand[1], supply[2], externalities[3] and price[4].

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Name: Vishal Bharam

Commentary number: #1

Due Date: February 1, 2008

Source: Unknown author, (January 12, 2008), No lakh of daring, The Economist

Section: 2, Microeconomics

Word count: 747

 

 

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 demand, supply, externalities and price.

According to the law of demand ceteris paribus, 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 curve (D) to the right (D’) (refer figure 1).

                                                        Nano market

        E        

The increase in demand will attract Tata (the producer) to produce more of this car. Therefore, the supply of Nano will increase, leading to a shift of the original supply curve(S) down to the right(S’). These shifts in demand and supply curve will lead to a change in equilibrium point (E) of the Tata Nano market.  The new equilibrium point (E’) will have a greater quantity traded between consumers and producers.  The price of Tata Nano will fairly remain constant or undetermined.  

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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 ...

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