Steel costs threaten makers of auto parts. "Parts suppliers, always under pricing pressure from their customers, have so far had to absorb an astonishing 54 per cent rise in the price of hot-rolled coil steel since last June", (Porter I, 2004, 'Steel costs threaten makers of auto parts', The West Australian, p38). This presents a huge problem for the producers of auto parts, as they see their profits being eliminated, leaving them with two options. They can either honor their existing contracts and bleed to death, or break their contracts and risk being sued by the auto industry.
In this article we are going to examine the market forces of supply and demand, and touch upon how elasticity works.
The auto part market is a competitive market; this basically means that it has many buyers and sellers, which the producers have to interact with, both as suppliers and customers.
This is where the concept of supply & demand is applied. Supply & demand are the market forces which determine the quantity demanded of a given good produced, and the price at which the good is sold. The quantity demanded of a good is often directly connected to the price of which it is sold. The higher the price, the smaller the quantity demanded. At the same time, the fewer consumers are willing to pay, the fewer producers want to supply. The balance where the quantity supplied and the quantity demanded are the same, is called the equilibrium. The change in quantity demanded when the price changes depends on the elasticity of the market. Elasticity measures the responsiveness of quantity demanded or quantity supplied to one of its determinants. If a product is elastic, then a price increase is going to reduce the quantity demanded substantially, sending the customer...