Like all other industries, the auto industry can be illustrated by basic macroeconomics. If there is a low demand, then the purchase price will decrease. On the contrary, if the demand exceeds the supply of the vehicles on site, then the price can have a sudden increase. The manufacturer controls and oversees the inventory that is shipped out to the dealers (1). The price of cars will also increase in the buyers' incomes enlarge. Automobiles are considered a normal good, therefore if average income rises, so would the demand, supply, and price of cars (2).
Gasoline, a strong complement of automobiles, will always continue to have a steady effect on the demand curve (2). As the price of gas has risen, the demand for smaller and more fuel efficent cars has increased exponentially. The market for SUV's has decreased, therefore Toyota reacted by raising the price and production of its Pruis hybrid cars (3). In just two years (2005-2007) Toyota doubled its production rate of Prius cars, all because of simple supply and demand economics.
2 comments:
All good points about what affects the supply and demand of cars and light trucks.
I've always found it interesting how not only the gas prices but different regions of the world affect the demand for small cars vs large cars and trucks. For example - anyone who's travelled internationally knows that in many parts of the world, the cars are much smaller. Even areas that demand larger vehicles, ie areas with poor roads, smaller trucks like the Toyota Hilux or Chevy Luv are much more popular than the larger trucks we have here, like the Chevy Silverado.
The trend of the SUV is very intriguing, as the decline in demand wasn't caused by a simple fad. Rather, the price of a complementary good within the auto industry spiked and caused a major shift in auto makers' lineups. SUVs were once marketed as autos of the future, and they practically made wagons and vans obsolete. Now auto makers have slashed up to half of their SUV line-ups. SUVs were once cash cows for the auto makers. The profit margin on each SUV was significantly larger than the profit margin of a regular or compact auto. For example, Ford made $18,000 on each Ford Expedition SUV, while it lost money on the compact Ford Focus unless customers selected options on top of the base price. While the SUV isn't exactly the Concorde of the auto industry, its production and popularity have fallen in favor of new breeds such as "cross-overs." It'll be interesting to continue watching the trend and decide whether gas prices can reincarnate the SUV or send them to rust in the junkyards.
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