Article Summary
The Tesla Motors is expected to face considerable increase in its profits from the launch of its new electric car, Model 3. The car is aimed to achieve higher sales due to its lower price. The car is priced at $35000 . This is quite an attractive offer for low cost car purchasers. Moreover, there is a tax incentive for such electric cars from the government. Presently the government is offering a $7,500 tax credit on the model. This rebate is further bringing down the price of the car to the buyers. Since the demand for low priced cars are more price elastic the tax rebate will lead to further increase in sales for the new model which will hit the road in 2017.
The tax rebate has important implications for the sales of the new model. Once Tesla motors has reached the threshold sales of 200,000 cars the rebate will be halved and further increase in sales will reduce the rebate to 25% of the current amount . The fall in the rebate will affect sales as the demand is highly elastic. So Tesla should be prepared for a fall in sales in the future. To reach higher profit Tesla should take the scale of operation to the optimum point where the average cost is lowest. Thus, to reap the benefits of economies of scale Tesla Motors should try to achieve a higher scale of operation. Given the low price of the car that boosts demand, making higher production will be quite feasible. In the figure below we show how reaching a higher scale can increase the sales for the cars. The fall in average cost will lead to higher supply shown by a rightward shift in the supply curve from S0 to S1. As a result the price of the car falls leading to a rise in demand along the demand curve from Q0 to Q1.
P S0
S1
P0
P1
D
Q0 Q1 Q
Works Cited
Grant, Charley. "Tesla: How Uncle Sam may Cause Sticker Shock." The Wall Street Joutnal 28 March 2016. English.
