Supply and Demand of New Cars Due to changes in the market Determinants

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Definitions

Demand– Quantity of goods and services a consumer is willing and able to consume at a prevailing market prices.

Supply– Quantity of goods and services a supplier is willing and able to supply in the market given the available technology and prevailing market prices.

Price– The quantity of payment or compensation a consumer is willing and able to give in return for goods or services.

 

List of figures

Figure 1.0 – Market Equilibrium (Supply and Demand Curves)

Figure 2.0 – Effects of changes in petrol prices.

Figure 3.0 – Effects of extension of scrappage scheme

Figure 4.0 – Effects of decrease in prices of new cars

Figure 5.0 – Effects of decrease in prices of crude oil by 20%

 

 

Introduction

Introduction of new cars in the market, brings with it new changes into the market with the older vehicles cars facing stiff market competition. However, the new cars supply and demand into the market is determined by a number of variables. The demand if influenced by the consumers taste and preferences, the prices of the cars, incomes of the target market consumers, prices of related cars, expected prices of the cars in the future and number of consumers in the target market (Basij J. Moore 1988).

The law of demand states that, holding all other factors constant, the quantity of goods and services (i.e. cars) demanded is directly proportional to the prices of the cars. This implies that an increase in prices of the cars less will be purchased while a decrease in the prices would lead to an increase in the number of cars demanded.

The quantity of cars to be supplied by the manufacturer will be influenced by the following factors: these include prices of the products (cars) in the market, technology available, indirect taxes and subsidies, labor productivity, price expectations and entry and exit off rules in the industry (Arrigo Opocher 2009).

The law of supply states that, holding all other factors constant, an increase in price of product supplied increases the quantity supplied. This implies that if the prices of new cars increases, the manufacturer will be motivated to supply more and more quantities of the car into the market while a decrease in the price would lead to a decreased supply into the market since less profit/proceeds from the sale are generated by the manufacturer.

Demand and supply of cars into the market determine the market price, quantity demanded and supplied, assuming no direct interference in the market by government or authorities (Paul A. Samuelson 2000).

Figure 1.0

Point C is the market Equilibrium where 4 Units is the Quantity demanded and supplied into the market while 4 Pounds shows the prevailing market prices for the demanded and supplied cars.

This only occurs in a competitive market where government influence is negligible 1.e market prices and quantity demanded and supplied is determined by the forces of demand and supply.

Effects of Petrol Prices Decrease on New Cars Market

Petrol is a compliment good to cars. They are used together. A decrease in the petrol prices implies that using a car becomes less expensive thus much affordable to many. This would lead to an increase in demand of cars.

The total effect of a price change is actually combined of two different effects, the income effect and substitution effect. Income effect is when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases. An example of income effect is that if the price of petrol increases, everyone’s income is still the same. People will feel poorer and couldn’t afford the new price of the petrol thus fewer cars will be demanded.

Next is substitution effect, an example for its explanation is that the prices of the petrol increases but the salary of automotive users still maintains the same, so they will find a substitute good to replace it. They will substitute to a good that will allow them to consume as little petrol as possible.

Figure 2.0

Increase in prices of petrol (A compliment good) would lead to a decrease in quantity of cars demanded from Q0 to Q1. This would lead to a long run effect of decrease in prices from P2 to P1.

Decrease in prices of petrol (A compliment good) would lead to an increase in quantity of cars demanded from Q1 to Q0. This would lead to a long run effect of an increase in prices from P1 to P2. In the long run there would be an increase in supply of the cars due to increase in prices implying that manufacturers would make more proceeds/profits.

 

Effects of Government plans to extend the Scrappage scheme indefinitely

The scrappage scheme introduced by the government aimed at reducing the number of old environmentally unfriendly cars. The government would give £2,000 discount on a new car, if you decided to scrap one that is at least 10 years old. This has seen the demand of new cars increase indefinitely.

This implies that an extension of the scrappage scheme would see the demand and supply of new cars increase.

Figure 3.0

An extension of scrappage scheme would lead to increased demand of new cars from D1 to D2. The price change effect would not be immediate since there would be a discount of the price of the car.

Effects of fall in Prices of New Cars on New Cars Market

A decrease in the prices of new cars in the market, holding other factors constant, would lead to a decrease in the supply of the cars in the market.

Manufacturers would not be motivated by the decreased prices since the profits margins would decrease.

Figure 4.0

A decrease in the prices of new cars from P1 to P2 would result to a decrease in the quantity supplied from Q2 to Q1. This is because the manufacturers and suppliers would have less profits proceeds.

 

 

 

 

Effects of fall in Prices of Crude Oil by 20%

A fall in prices of crude oil by 20%, holding all other factors constant, would result to a decrease in the prices of petrol.

Petrol being a compliment good to cars; holding all other factors constant, a decrease in petrol prices would result to an increase in car demanded since it would be less expensive to own and operate a private car.

Figure 5.0

Decrease in prices of Crude oil would lead to decrease in prices of petrol, holding all other factors constant. Decrease in prices of petrol (A compliment good) would lead to an increase in quantity of cars demanded from Q1 to Q0. This would lead to a long run effect of an increase in prices from P1 to P2. In the long run there would be an increase in supply of the cars due to increase in prices implying that manufacturers would make more proceeds/profits.

 

 

Conclusion

Demand for new cars is determined by a number of factors that would have an effect on the purchasing power of consumers or the ability of suppliers to supply more into the market.

Decrease in prices of cars or compliments goods (Petrol), definitely raises the income available for the purchase of the car. The consumer’s income may remain the same but they will have more purchasing power.

When the prices of the cars decrease, suppliers get discouraged since the cost of production assuming remains the same, then the proceeds/profits remains low.

 

Work Cited

Jain, T.R. (2006–07). Microeconomics and Basic Mathematics. New Delhi: VK Publications. p. 28

Kibbe, Matthew B. Cato Institute. Retrieved 2014-04-18.

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Arrigo Opocher and Ian Steedman, “Input Price-Input Quantity Relations and the Numeraire”, Cambridge Journal of Economics, V. 3 (2009): 937–948

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