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Question:

Discuss about the Demand and Supply of Cars.
 
 

Answer:

Introduction:

Every market is driven by the demand and supply components of the product. One of the most important sectors of an economy by revenue is the automobile industry. The demand for automobile is generally the demand for transportation. Just like other markets, here also the demand and supply of cars are affected by various factors. As per the law of demand or supply price of cars causes a movement along the demand and supply curves of the markets for cars whereas changes in other factors result in the shift of the demand or supply curves(Mankiw,2007). We shall move ahead, to look into the sale of cars in Australia as well as effects of changes in price of cars and changes in other factors affecting demand and supply of cars in the market.

The automobile industry like that of other countries is also a crucial part of Australian economy. As was recorded till November 2015, the sale of new vehicles in the country was seen to rise by 6.9% as compared to the sales in the same time the previous year. A report by the Australian Federal Chamber of Automotive industries’ VFACTS showed that the sales summed up to 98,639 in the month of November of 2015 which was recorded as 92232 in the previous year for November. The total for the 2015 was seen to rise to 1.06 million which is found to be 3.9% more than that of 2014. The sales for SUV cars were seen to increase in 2015, by 16.2% whereas passenger car sales decreased by 3.1%. The light commercial vehicles saw an increase in demand by 16% along with heavy vehicles sales rising by 8.7%. Toyota was seen to be consistent in the first place with a 18.7% market share in the November of 2015 followed by Mazda with 9.9% and Holden 9% (Sydney Morning herald, 2015). Victoria is considered to be the main contributor of Australia’s automotive sales, with 60% of the turnover coming from Victoria as well as a majority of exports (LiveinVictoria).

Just like other markets, here also going by the law of demand, a fall in price of cars shall cause an increase in the demand for cars whereas a rise in price shall cause a decrease in demand. Similarly, as per the law of supply, a fall in price will decrease the supply of cars in the market whereas a rise in price shall increase the supply of cars in the market. In today’s world, the sale of cars has increased significantly through the years with varying models being manufactured based on various price segmentations(Pindyck et al, 2009). Households, from different income levels are moving ahead to buy a car they can afford which has been possible, because of the increase in production or manufacturing of cars segmenting them in different price levels. The pricing of cars are dependent on a number of factors, like the demand and supply of the cars, the pricing by competitors, the prices of complementary goods like fuel needed to ride the cars, or automobile parts or accessories, etc. The pricing of cars also affect the demand supply pattern for cars. An increase in price of cars delays the purchase of cars by individuals, or chooses to buy a different type of car or may not buy a car at all and shift to a different mode of transportation(Varian, 2010).  The three products which are complementary with the purchase of a car are gasoline, infrastructure and insurance (Salor Academy, 2011).  Price changes of these will also affect the demand for the car purchase. Below we see some of the other factors apart from pricing which affects the demand for cars:

 

Income: Just like income changes affect the demand for other products it also affects the demand for cars. A vehicle is considered as a luxury good with as well as high income elasticity of demand. If a person’s income increases significantly, then his purchasing power increases and he finds it more affordable to buy a car. If income falls, then the person does not plan to buy a car till there is any significant change in income.

  • Tastes and preferences: Preferences also matter when we consider the demand for cars. There can be individuals who prefer certain type or model of cars and hence adding to the demand for those cars whereas there are also the types of individuals who do not want to buy a car even if they can buy one.
  • Geographical conditions: Geographical conditions also significantly affect the demand for cars. Households living at areas where the infrastructural or location constructions do not allow them to enjoy the benefits of riding a car and other modes of transportation may be more reliable or convenient.
  • Expectations: Price changes expectations significantly determine the demand for cars. If prices are expected to fall in future then people would tend to reduce demand in the present and buy more in the future.
  • Prices of Complements: As previously mentioned, pricing of complementary goods or services also affect the demand for cars. For instance, the rise in price of gasoline may cause a fall in demand for cars or vice versa. The rise in cost of financing a car may also result in lower demand that occurs when interest rates rise and people tend to buy fewer vehicles (Sam P) (Salor Academy, 2011).
  • Prices of Substitutes: Generally if you consider, substitutes for cars may be other modes of transportation which may or may not affect the demand for cars in this case. Though of course if the price of cars increases then people would tend to shift to other modes of transport. Competition also arises in between companies or different types of cars. A fall in price of a station wagon may decrease the demand for 4WD cars (Salor Academy, 2011).
  • Advertising or marketing: More a company advertises its car models. The more it reaches out to its customers letting them know the different features it offers as well as attracting customers with its pricing strategies. Hence, advertising is a crucial factor determining the demand for cars.
  • Easy financing options: The availability of financing options, easily attainable also determine the demand for cars, since easy financing options make the purchase of cars more attractive and attainable for consumers.
  • Macroeconomic factors: Economic growth or boom, inflation or recession, different macroeconomic indicators also affect the overall demand for cars (Riley, 2011).

Just like the above, there are also many factors that affect the supply of cars in the market. Some of those factors are:

  • Input prices: Prices of inputs is a very important factor that determines the supply of cars. If there occurs an increase in the price of automobile parts which are used to manufacture an automobile, or increase in other inputs inclusive of labor and capital can affect the supply of cars in the market. An increase in prices of inputs, shall force producers to decrease supply of cars in the market and vice versa.
  • Competition: The competition between different sellers of cars also affects the supply of cars. Each seller tries to increase his market share keeping in consideration the pricing strategies of the other sellers.
  • Technology: The innovations implemented in manufacturing new car models are a derivative of technology itself. The more advanced technology gets, the more efficient is the production of cars and hence increasing the supply of cars.
  • Consumer expectations: Expectations of consumers is also considered as an important factor by sellers to determine the supply of cars in the market. If consumers are expected to buy more in the future period, then sellers reduce supply in the present period.
  • Market size: Just like other markets. Here also the number of sellers in the market a factor in determining the total supply. The more the number of sellers in the market the greater is the market supply.
  • Change in government policies or taxes: Changes in government policies regarding the automobile industry can also affect the supply. Imposition of customs on raw materials and inputs for instance increases the cost of production and hence reduces the supply of cars.

Hence, we saw the sale of cars in Australia and different factors affecting the demand and supply of cars. Apart from the above mentioned factors, there can be many other factors that affect the automobiles market. The automobile industry of an economy is considered as an industry which reflects economic growth of a country with its demand and supply patterns being an indicator of the increasing income growth, purchasing power, consumption and development of the country.

 

References:

The Sydney morning herald, Business Day, 2015, Australian vehicle sales on track for record year, viewed 25 August 26, 2016, https://www.smh.com.au/business/retail/australian-vehicle-sales-on-track-for-record-year-powered-by-suvs-20151203-glecdl.html

LiveInVictoria, Automotive industry in Victoria, viewed 25 August 2016, https://www.liveinvictoria.vic.gov.au/working-and-employment/victorian-industries/automotive#.V79RxPl97IU

Pindyck, R, Rubinfeld, D & Mehta, P 2009, Microeconomics, Pearson, South Asia

Varian, H 2010, Intermediate microeconomics, Affiliated East-West Press, New Delhi

Mankiw, G 2007, Economics: principles and applications, Cengage learning, New Delhi

Riley, G, 2011, What economic factors affect the demand for new cars?, viewed 25 Aug 2016, https://www.tutor2u.net/economics/blog/economics-qa-what-economic-factors-affect-the-demand-for-new-cars

Sam, P, Economics of clean cars, viewed 25 Aug, 2016, https://economicsofcleancars.wordpress.com/economics/market-demand/

Saylor Academy, 2012, The demand for automobiles, viewed 25 Aug 2016, https://saylordotorg.github.io/text_microeconomics-theory-through-applications/s20-01-the-demand-for-automobiles.html

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