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Add to FavoritesHigher gas prices do not increase demand for new automobiles for several reasons. These reasons are summarized in the following section and then elaborated upon thereafter. Moreover, time tested economic principles in addition to common senses budgeting and financial management illustrate the premises that support the conclusion higher gas prices do not improve auto sales.
*Price elasticity of gasoline indirectly affects purchasing habits
*Inflation caused by higher gas prices tightens consumer budgets
*As of 2007, hybrid technology is often more expensive than traditional vehicles
*Alternative driving patterns are a more cost effective solution to increased gas prices
*New cars have higher insurance premiums
*Sales of automobiles such as SUV's are more likely to be affected by high gas prices
Higher gas prices decrease auto purchases because of an economic principle called price elasticity. Automobiles are more 'inelastic' than gas which is 'elastic' meaning changes in price have little affect on demand. However, for elastic products like gasoline, changes in prices do have a more significant affect on demand. Thus, when gas goes up less people want to purchase it which indirectly affects the will to drive and purchase new cars.
This is not the only reason however as higher gas prices are also tied to an economic metric called the inflation index. This index measures how much the price of consumer products rise each month. While some inflation measurements do not include the price of gasoline others do. Since inflation rises when gas prices go up the cost of living also rises and the dollar or other currency has less purchasing power. With less purchasing power, consumers are less likely to want to purchase a new automobile.
Some may argue it is simply not the case as some new cars are now equipped with hybrid technology increasing there fuel efficiency. However, what is not always considered is the increased cost of this hybrid technology in automobiles. In other words, as long as hybrid cars remain more expensive than regular combustible engine vehicles, the demand will remain priced out for many consumers due to the same economic principles mentioned above i.e. price elasticity. Even though cars are more inelastic than gasoline they are not as inelastic as expensive medical procedures such as bypass surgery. Thus, while price doesn't have as great as an affect on demand with a more elastic product, demand is still affected. What's more, many people have budgets and if something doesn't fall within that budget, it is often not considered a viable option.
As gasoline prices rise, consumers become more conscious of their driving habits and think twice about whether to make individual trips for individual errands and items. Instead of buying new cars, people may consider lumping driving activities together to save on the cost of gas and not have to purchase a new car. What's more, new vehicles, especially ones that use a lost of gasoline such as many SUV's often also have higher insurance premiums adding little tax incentive to purchase a brand new vehicle. People may consider purchasing a more fuel efficient used vehicle than a new car in light of this.
In summary there are several reasons new cars are not a likely consumer reaction to higher gas prices. These reasons are validated by economic theory and common sense logic regarding the use of money and personal budgeting. While it is nice to think that higher gas prices would increase demand for automobiles, the increase gas prices are demonstrated to be an ineffectual economic stimulus herein.
Sources:
http: //economics.about.co m/cs/micfrohelp/a/pr iceelasticity.htm
htt p://www.answers.com/ topic/consumer-purch asing-power
http://fi ndarticles.com/p/art icles/mi_qn4196/is_2 0060808/ai_n16660831
http://findarticles. com/p/articles/mi_m0 FNP/is_22_44/ai_n158 93517
Learn more about this author, A.W. Berry.
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No
Higher gasoline prices alone will not necessarily have a negative impact on the volume of new car sales. Conversely, it is likely that more new cars will be sold as consumers trade in their inefficient vehicles for newer cars that offer better fuel economy. However, the profitability of new car sales will probably suffer and other current economic factors will likely reduce sales volume.
Dramatically higher fuel prices have had a two fold effect on automotive supply and demand. First, consumers have had an historic change of heart regarding the types of cars they are demanding. The preference for ever larger, heavier and less efficient vehicles that has been growing for the past decade has taken an abrupt u-turn. New car buyers are now becoming interested in the fuel economy ratings of new vehicles as a primary factor in making their purchase. Just watch the advertisements for new cars and you will see a majority of them touting fuel economy, a specification that was barely mentioned a little as a year ago. Hybrid vehicles are finally getting traction in the marketplace, more and more subcompacts are appearing on America's roads, and SUVs are sitting unsold on dealer lots.
This is not good news for automakers. While sales volume may not be taking a significant hit, profitability is. Research and development costs for lighter, more fuel efficiency vehicles can be high and particularly new technologies such as electric and hybrid can carry even higher costs. Whereas a highly profitable Hummer can be built largely from existing parts bin components, General Motors must build the economical Aveo at its Korean Daewoo facility to eke out a profit. Many automakers have also been slow to recognize the coming trend and have large inventories of unwanted vehicles. At the same time, they are only beginning to ramp up production of smaller cars.
Trade-in value is another significant factor in this equation that may have a negative impact on new car sales. Buyers who have financed larger, more expensive vehicles may find themselves unable to reach a satisfactory deal when trading on a less expensive smaller car. Dealers can often add any negative equity on a trade-in to the purchase price of a new vehicle, but this becomes difficult when there is a low profit margin on the new car.
The current financial crisis is having a much greater impact on new car sales than higher fuel prices are. Many consumers are feeling a financial strain due to the current state of the economy and even those that are not may be unable to buy due to the tighter financing market. Automakers who were rushing to offer financing at zero percent may now have trouble financing at any rate.
Higher fuel prices alone will not cause a precipitous decline in auto sales volume. The automotive market is probably in for a bumpy ride in the near future, however, due to the changes that fuel prices and other factors have brought about.
Learn more about this author, Eric Wolf.
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