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    Posted September 28, 2010 by

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    Demand and Supply of Cars

    Since the recession began in 2007/2008, the demand for new cars in the UK has reduced by approximately 30%. Like I have already stated, this is because consumers have less disposable income to spend on new cars. And are therefore, opting to keep their current cars for longer. Or an alternative would be to sell your current cars which you could do to raise money in order to buy a new car. Or instead of buying a new car, buy a second-hand one.
    Between 1996 and 2006, second-hand car prices reduced 20%.  This meant that second-hand cars became cheaper to buy than new ones. This could have been caused by two factors. People having more disposable income, therefore opting to buy new cars rather than second-hand ones. So the demand for second-hand cars diminishes and therefore, prices become reduced. Also, people buying more new cars means more people are selling their old cars. This means that there are more second-hand cars on the market. This means that there are more second-hand cars on the market, also causing the price to become lower. Since the recession started, it can be expected that the prices for second hand cars have increased. This is because people are deciding to keep their cars for longer. So demand for new cars overall will decrease. Also, as people are keeping their cars for longer, there are fewer second-hand cars on the market, reducing the amount of supply. Secondly, people are choosing to buy second-hand cars over new cars as new cars are more expensive. Also, more who can’t afford to keep their cars have to sell them on in order to save money. Also, the government’s car scrappage scheme will reduce the number of second hand cars on the market. This is because people have to hand in their old cars to get the discount. So there are fewer second-hand cars on the market, so supply will be reduced.
    However, this encourages people to buy new cars rather than second-hand ones. Therefore, the demand for second-hand cars becomes reduced.
    As a result of this, manufacturing business that produce car parts and related businesses have seen their revenues reduced. As a result, manufacturers feel the need to reduce the number of cars they produce in order to bring their prices back up.
    Therefore, companies have had to make staff redundancies to cut costs, which has seen a further reduction in consumer spending such as on cars. So is a never ending cycle. Also, in order to try and break this cycle in the UK, the government has implemented the “Car Scappage Scheme”.[1] This is where people can trade in their old cars for a discount of up to £2000 on their new cars which is funded by the government.[1] In terms of Demand and Supply, this means that the prices of cars stay the same, but part of the  price is paid for by the government. Therefore, the demand for cars hopefully stays at pre-recession levels without people having to pay the extra costs of the higher level of demand.
                Therefore, consumers pay the “New Equilibrium Price” and manufacturers receiving the “Old Equilibrium Price” with the government paying the difference.
    Now we move onto complementary and supplementary goods. The most obvious complementary good for motor vehicles is oil. In every recession, as outputs are reduced, the price of oil reduces. This is because less oil is needed in the production and transportation of produced goods. Therefore, it becomes cheaper to run your car. But also, as fewer people are buying new cars and more people are selling their old cars, the demand for oil also reduces in that sense. This is because fewer people have cars and the people who do are using them less. So as the demand for oil reduces, the price of oil therefore, also reduces.
    In the latter half of 2008, oil prices fell by half. This is largely caused by a drop in the demand for oil for use in the production of goods and corporate transportation costs due to the reduced trade.
                Now I’ll move onto supplementary goods. Instead of travelling by car, people can chose to travel by public transport such as using trains or buses. As the cost of oil reduces, theoretically, the costs involved in public transport should also be reduced. Also, as energy production moves away from oil and gas and more onto nuclear and renewable sources, the cost of running train networks should become more stable and less reliant on oil. Therefore in the long-run, transport cost for trains should be lower than many other forms of transport. This is because other forms of transport rely more heavily on oil and are therefore, more vulnerable to increases in oil prices.

    Word Count 1200
    [1] (BBC NEWS, 2009) http://news.bbc.co.uk/
    [5] (Federal Reserve Bank of Chicago, 2009) http://midwest.chicagofedblogs.org/cars-thumb.jpg

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