Economics Of The Automotive Industry Essay

2503 words - 11 pages

The Economy and the Automotive Industry
Melissa Dykes
Axia College of University of Phoenix
ECO/205
Shaun Brown
January 18, 2009
The Economy and the Automotive Industry
The United States automotive industry has been at the forefront of much of the headlines in recent days. The current economic crisis that this country is in is affecting nearly every person and every industry, and it seems that the auto industry is one of the industries most affected by the state of the economy. The automobile industry is often viewed as the backbone of this country's economy, and many still feel that way. After all, people rely daily on cars and trucks to transport them and help them live their ...view middle of the document...

There is no elasticity of price and demand on this part. Supply and demand will remain more consistent.
Owning and maintaining a car can be costly. There are the costs of payments if the car is not purchased outright, and the cost of insurance. Cars require routine maintenance, and repairs are sometimes required. Perhaps the most common cost most people consider with owning a car is the cost of gasoline. When the country's economy is stable and growing and the cost of gasoline is relatively inexpensive, people are more apt to purchase more luxurious vehicles that usually are not as fuel-efficient as are smaller cars. However, when the economy is unstable and is not growing, people generally will try and find a way to save money either by purchasing a smaller vehicle, driving less, or using alternative means of transportation such as buses, trains, and subways. Therefore, in good economic times, the demand for cars will usually be greater, making the supply of cars less. In poor economic times, the demand for cars or for less fuel-efficient cars will decrease, driving prices down in order to entice buyers. Automobiles are an elastic item. The supply, demand, and consequently price are impacted by current economic conditions (Transportation Elasticities, 2009).
As mentioned before, the cost of gasoline greatly impacts the supply and demand of automobiles. In recent history, the United States saw gas prices soar to all-time highs as oil prices increased substantially, beginning with Hurricane Katrina in 2005. Gas prices topped out over the summer of 2008 at well-over $4.00 per gallon. In a speech made in September 2008 in Chicago by President-Elect Barack Obama during his campaign, the issue of gas prices and their impact on the driving habits of Americans was discussed. Obama said that increased gas prices would cause people to seek out smaller cars which are more fuel-efficient. He mentioned during his speech that sales of sport-utility vehicles and large trucks had fallen considerably and that the sale of medium and smaller sized cars had risen proportionately. During his campaign Obama urged automakers to increase their standards for fuel efficiency. He stated that the automakers had made strides to do just that but that more could be done and that the government should have a hand in helping the automakers achieve greater fuel-efficiency standards (Mason, 2008).
Negative Externalities of the Auto Industry
According to Gregory Mankiw in the book Principles of Economics, "an externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect (p. 204)." Externalities can be positive, or they can be negative. In the automobile industry, there are two widely-known negative externalities. They are exhaust emissions and traffic-related stress.
According to an article published by the National Safety Council (NSC), the NSC says that the...

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