Supply and Demand Paper
Supply and Demand Paper
There are many factors that should be considered before buying a new car; this decision should be based on in-depth consumer research prior to stepping foot onto a dealership lot. In today’s vehicle market you can expect to see varying interest rates, varied vehicle supply and depending on the economy, dealership promotions and gimmicks which all play a role in the decision making process for a new vehicle purchase. The vehicle sales market is very competitive; do not let the undertaking duty of purchasing a new vehicle become overwhelming. Instead, prepare yourself with ample consumer research and knowledge before you go new-car shopping. Most adults have heard the saying ‘Supply and Demand’. But, what is Supply and Demand? Supply and Demand can be defined as a monetary rise and drop of the cost of a good. When the price of a good goes up, the quantity of the good diminishes and reversed, when the price falls then the demand will rise.
When applying Supply and Demand theories, in today’s economy, you can see the demand for new vehicles has decreased. Supply and Demand are two words that seem to be synonymous with the word competitive. In regards to a vehicle purchase, competitive markets are what keep good car dealerships in business because they have mastered the competitive technique to work with Supply and Demand. Essentially, Supply and Demand determines the vehicle prices. Research, of your local area, can help a buyer determine the local economies position as well as other factors that could cause variation in the Supply and Demand of new vehicles. When considering the purchase of a new vehicle, it is important that a buyer look at other factors which may shift the demand curve. Factors that may shift the demand curve will include: the cost of related goods, style, expectations, income, and the number of buyers. The cost of related goods, meaning a new vehicle, is nearly the same but a responsible consumer should research for the best price. Income will always be a factor in the demand curve. If there is a downward shift in income then the demand for a new car will also follow the down trend because consumers will have less money to spend.
If your income is stable then the curve will be a great benefit because the cost of a car will drop while your income stays the same. If your income has dropped and the market has dropped as well, then you are still able to afford a new vehicle because the market has lowered prices in an effort to increase demand. If a new car is not within your budget or grasp you can consider several substitutes such as a taxi, car-pooling, public transportation or even riding your bicycle. Complementary goods are double-edges sword when you are considering these goods as factors of a new vehicle purchase. Complementary goods are essentially counterparts of a vehicle; these goods are products that are included with a vehicle. Complementary goods are items such as tires, an engine, a stereo system, engine size and, seats. The prices of complementary goods add to the total cost of the vehicle. This additional cost may have a negative effect on the demand for special products in a vehicle. The negative effect is because price of a complement can increase which makes the cost of the vehicle go up. In a poor economy, the demand for automobiles with extra or special complementary goods will decrease.
One example of a complementary good would be a sports car or an SUV with a V8 engine; this vehicle consumes a lot of gasoline. Gasoline costs can affect a consumer’s decision to purchase a car, truck, SUV or sports car. We all know a vehicle will not operate without gasoline, so, are you willing to spend a larger sum of money to fill the gas tank because you purchased a vehicle that gets low miles per gallon? If you consider gasoline as a complementary good then you realize when the price of fuel rises, that quantity demanded falls in the beginning. However, if the price of fuel stays high for an extended period then you may want to seek a fuel-efficient vehicle or other transportation substitutes. As a consumer you should think about long term possibilities of complementary goods before your purchase. The negative result of complementary goods is perceived as a negative cross-price elasticity of demand. In economics, the cross-price elasticity of demand measures the demand for a good and the price. This measurement is known as the percentage of change in demand and the response to the change in price. A change in price can persuade consumers to move away from a vehicle if the price rises.
A new automobile has an elastic demand which means if the price drops, then there will be a significant increase in demand for the vehicle. What factors determine the price elasticity of demand? Goods with close substitutes have an elastic demand. Substitutes, in this case, would be other modes of transportation. Another factor to consider is the definition of the vehicle market in your area. Closely defined markets have more elastic demand than a broadly defined market. Vehicles have an elastic supply; automobile manufacturers can produce vehicles more rapidly if the demand increases. On the flip side, automobile makers can produce fewer vehicles if the demand decreases. Elasticity usually depends on supply and the supply can vary by vehicle market. It is true that supply is more elastic in the long term over the short term. The decision to purchase a vehicle comes with so many factors; another element to think about is one of necessity or desire.
Is the choice to get a new vehicle a necessity or a desire? Are you choosing a vehicle that is a standard base-model or a luxury model? Necessities are an inelastic demand. This means the quantity demanded responds to changes in price. We all have personal preferences when it comes to vehicles but, you have to decide if a new vehicle is a necessity or desire. If you can afford a new vehicle then you can get a model made with your personal preferences. If you are getting a new vehicle purely out of necessity then you will likely choose a base-model which will be cheaper and inelastic. Two years ago I decided to purchase a newer vehicle. I work in a stable market and know that my job is secure; with this in mind I was able to purchase a new vehicle with peace of mind.
Prior to car shopping I did weeks of research; I made a list of what I wanted and then was able to choose a vehicle. I searched for a vehicle that was certified and came with a warranty as well as a high resale value and from a manufacturer that had a reputation for longevity. I commute to work each day so I needed a vehicle that boasted a good fuel economy. I am particular about the vehicle I own and I desired a medium line vehicle that had several upgraded features. Because I chose a vehicle with longevity I know I will not need to purchase another vehicle for several years. Hopefully our economy will rise within the next few years however, this will affect the supply and demand when I am ready to purchase again. Today is a buyer’s market for vehicles, which is great for the consumer. With that being said, consumers should consider all costs of vehicle ownership before signing on the dotted line.
Subject: Supply and demand,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 3 November 2016
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