Question

Using supply analysis, explain how is supply applied in the article below about Tesla.?

Thank you so much for your help.

Factors Affecting Supply (Tesla)

The Cost of Production and Cutting Off Unprofitable Vehicle Models

In January of 2019, Tesla cut 7% of its workforce to ramp up production of its Model 3 sedans, reducing the price of its products and boosting margins. At the same time, the company discontinued the cheapest versions of its Model S sedans and Model X SUVs (Browne, 2019).

Use of Technology to Create the Vehicles and Collaboration with Companies Producing Related Products

As of 2020, Tesla boasts a factory in Fremont, California, two Gigafactories in the United States: Buffalo, New York and Sparks, Nevada, a third Gigafactory located in Shanghai, China, and a fourth being built in Europe (Tesla, Inc., 2020; Saiidi, 2019). The Gigafactory in Sparks, Nevada is 5.3 million square feet of operational space and continues to expand. Once completed, it will be the largest building in the world. Elon Musk referred to it as "the machine that builds the machine." It is part of the plan to make the electric car more affordable by mass producing its own batteries using automation. Tesla currently produces more batteries, in terms of kWh, then all other makers combined, making about 60% of the world's Lithium Ion batteries. Panasonic is Tesla's exclusive battery supplier for the Model 3, with each vehicle requiring over 4,000 individual battery cells. Batteries are delivered through automated guided vehicles, the equivalent of driverless forklifts (Saiidi, 2019)

Sustainability

Once the Nevada Gigafactory is complete, Tesla plans for it to be mostly automated, continuing to reduce human labor as it turns into "the machine that builds the machine." The factory also plans to have its roof covered in 200,000 solar panels, being the largest roof solar array in the world, and aims to be a net 0 factory when finished. That means the total amount of energy used by the building will be equal to the amount of renewable energy created on site. Once battery packs and motors are completed at the Gigafactory, they are transported to the Fremont, California facility where they are assembled into vehicles. This Gigafactory will be the model for the Shanghai Gigafactory, and according to Elon Musk, there will be 10 to 15 more Gigafactories built around the world. Elon Musk's ambitious plan for Tesla and its Gigafactories is beginning to take shape, but with plenty of construction and adjustments still ahead, the road to achieving that vision has just begun (Saiidi, 2019).

Conclusion on Supply (Tesla)

According to economic theory, supply is growing steadily due to Tesla's decrease in the cost of production by reducing its workforce, technological advancements making production more efficient, and cutting out unprofitable vehicle models. Tesla's partnership with Panasonic will also make the production of batteries cheaper and easier which will help increase its supply.

Price of the Product in the Actual Market

Between 2018 and 2019, pricing for all models of Tesla vehicles has increased as the company has streamlined offeringsby consolidating variants (Palmer, 2019). The base models of the Model X and Model S have risen between 4-6% to $84,990 and $74,990, respectively. The pricing changes have also affected add-on features of the vehicles, like "Ludacris Mode," a $20,000 add on that is now included in performance packages of the S and X; and an increase of $1,000 in the price of Tesla's Full-Self Driving feature available on all models (Kolodny, 2019). Full-Self Driving has yet to be released but is an anticipated option among Tesla's current and prospective vehicle owners, a feature that will greatly increase demand of Tesla vehicles upon its release (Palmer, 2019; Kolodny, 2019). Musk has announced that the cost of Full-Self driving will increase every few months and has urged users to purchase early to take advantage of the lower price (Palmer, 2019).

    Tesla's move to decrease the delta in price between their highest and lowest options is an aim to "improve affordability for customers" (Palmer, 2019). A move that follows economic theory as demand for vehicles overall declined with the gradual elimination of tax-incentives for electric vehicles at the end of 2019 (Blanco, 2019). However, consumer demand has increased for the entry-level Model 3, and as a result, Tesla has increased pricing to maximize revenue, while consolidating trim options in higher end models to retain premium customers (Palmer, 2019). This strategy is in line with economic theory, as Tesla's demand increases while supply is throttled by production constraints. Orders for the Model X and Model S dropped 40% between quarter one and quarter two of 2019 in California, Tesla's biggest market. As sales for the Model S and X start to slow, Tesla is becoming crafty and consolidating features in the higher tier models as well as providing additional value like free unlimited supercharging with the Model X (Design Your Model X; Blanco, 2019). The pricing for these models has increased although sales have slowed, but the value provided to the consumer has increased. This strategy defies economic theory as the demand for the product is starting to slow and increasing the price will only disjoin the demand and supply trends further. An alternative theory is that because Tesla offers made-to-order options, the supply can closely match the demand and the new pricing is meant to appeal to Tesla's premium clientele (Leszinski & Marn, 1997).

    Tesla is ramping production of the Model 3 as consumer demand grows for an affordable electric vehicle (Randall, 2018). The current pricing for the Model increased in response to consumer taste and preference for an affordable electric vehicle. Supply for the Model 3 is also increasing quarter over quarter but still somewhat trails demand (O'Kane, 2020); this might be due to the Tesla's made-to-order fulfillment scheme. Demand for the Model S and Model X has slowed considerably as the Model 3 becomes the preferred option for entry level electric vehicles (Randall et. al., 2019). However, the price of the higher tier models has recently increased along an increased value in the higher tier trims (Templeton, 2019).

​Based on the findings for Tesla's supply and demand, there is a higher quantity demanded than quantity supplied especially in the entry-level Model 3, meaning there is a shortage in Tesla vehicles. Although supply is steadily increasing, demand has been exceeding expectations for Tesla. Tesla has eliminated models and revamped production of the Model 3 while simultaneously raising the pricing of their premium Model S and X trims to help maximize revenue. What Tesla is doing with the Model 3 supports economic theory as demand is outpacing supply causing the movement of the demand curve to the right and resulting in a higher equilibrium cost. On the supply side, Tesla has increased the output of their facilities while lowering costs related to production of their vehicles, and with their global expansion they are looking to produce supply at lower prices; however, until supply is sufficiently ramped, demand will continue to lead to a slight shortage as they improve their technology.

Answer 1

As mentioned in the case above, " reducing its workforce, technological advancements making production more efficient, and cutting out unprofitable vehicle models.". This leads to shift on supply curve to right.

Supply curve shifts to right when costs go down, taxes go down or subsidy is given. If spare capacity increases or technology advances leading to more productivity. This may also lead to decrease in price of cars in this case.

Tesla is following differentiated pricing strategies for different models depending on the demand and consumer affordability. Supply may also be constrained due to availability of raw materials or workforce related issues.

In this case as supply is driven mainly by technology , this is a capital intensive business.