10/20/2010

Demand

The Cash for Clunkers program provided incentives for automobile consumers, essentially lowering the price of the product. This lower price increased the quantity of cars demanded and sales dramatically went up. When the program was over and the price went back down, so did the car sales. This is a very accurate example of the change in demand through price. We can also see that the program was effective for the fuel efficient cars but not for the gas guzzlers. We can see that fuel efficient cars are a substitute for gas guzzling trucks because the decrease in price of the fuel efficient cars decreased the quantity demanded for the other. We can also see at the end of the article where automakers manipulated price again to decrease the quantity demanded so that they could replenish their inventory. What a good article for the topic of demand.

2 comments:

Ralphie said...

I disagree with the premise that the cash for clunkers program actually decreased the cost of vehicles for the consumer. The car sales people more than likely increased the price of the new, "fuel-efficient" vehicles for the individuals purchasing the new cars.
In addition, since there were so many used vehicles taken out of the market, and the economy is in such a poor state, there is a decrease in the supply of the inferior good of used vehicles, and an increase in demand, which will actually raise the price of the used cars.
-Ralphie

Dave said...

Another aspect of this worth thinking about is that it is a good application of the problem with durables (this gets skipped at undergraduate levels, but is in your text).

Since durables last for a while, incentives like this shift demand, rather than create new demand.