9/13/2011

New vs. Used

I heard a news report on the radio last week that implied new vehicle sales were up due to the high prices of used vehicles. I bought a pickup truck at the end of 2007. I curiously checked the Kelley Blue Book value of it 10 months later and was a little miffed to see the value of my truck had dropped almost $5,000. I just checked the value again and surprisingly it is hasn't dropped much over the past 3 years. Used vehicle prices are currently so high that in many instances it makes more sense to buy new. According to edmunds.com, in a typical economic climate, there is usually more value in buying a used car. However, the current economic climate is anything but typical. The deals on new cars are so enticing as to make buying a new car the better alternative over buying a certified pre-owned or a one year old car of the same model. There are also some pretty good perks to buying new such as warranty and interest rates. Below the same article on edmunds.com is a list of vehicles with lower than or similar monthly payments when comparing new and used vehicles. In our current economy, the prices of used vehicles are to the point where people are going to go with a substitute, which in this case has increased the quantity demanded of new vehicles.

10 comments:

Dr. Tufte said...

I think what you're driving at here is that the income elasticity of new cars is higher than that for used cars. This means that the demand for both shifts left in weak economic times, but the demand for used cars shifts more.

Something to also consider here is the discussion of durable goods demand and elasticity. This text does a better job than most of covering those in Chapters 2 and 3.

Unknown said...

For someone like me who is currently listing a used vehicle for sale, your post is hardly reassuring! Maybe I won’t find a buyer as quickly as I’d like after all? I originally listed the vehicle at high blue book value for a private party resale and the demand was low. As I’ve adjusted the asking price, it’s been interesting to watch demand rise as more and more phone calls have come in. This experience has led me to consider the economics surrounding new and used vehicles.
When are automobiles considered to be luxury and not inferior goods? When are they considered to be durable? It’s safe to say that disposable income is lower now than it was several years ago in a growing economy which suggests that buyers may hold off on large purchases such as automobiles; yet, it is also important to realize that there is always a market for these types of goods. While one party might view an automobile as an instant loss of investment, another may not be concerned with the future value of their purchase – the individual economic states of the two parties allow them to regard such an investment, and the value therein, quite differently. When income is higher, the demand curve for spaghetti dinners shifts to the right. Right? And so it is with the market for automobiles. The timing may be wrong for some buyers while timing has nothing to do with the decision for others.
So, I won’t get discouraged if my vehicle stays on the market a bit longer than usual. New and used automobiles, however differently they may be viewed by various audiences, will always have some level of value if the economic climate, both public and private, is right.

Dr. Tufte said...

There is a tight definition of luxury and inferior goods: income elasticity greater than one, and income elasticity less than zero. The trick is measuring the elasticity. In general, you can't do this for a single item like your car.

There isn't a tight definition for a durable. It's something that is used for more than a year, and delivers a fairly steady stream of services. So a car fits that definition.

The thing about durables that's goofy, and that this text does a good job on, is that their demand is influenced by how many have been sold in the recent past. If, for some reason, people bought more cars than normal recently, then the demand for your car will be lower.

The other issue that comes into play with the psychology of selling durables (and which is not usually covered in Man Ec texts) is liquidity. While you sit on that used car, your wealth is less liquid. That bugs some people. And, if it lasts long enough it can change your purchases of other goods, and/or cause you to take a price lower than you'd like.

Lando said...

There is also another determining factor in this situation I believe. The compliment association between fuel prices and the purchasing of cars. In large part, we should be happy that the price for a barrel of crude hits some resistance everytime it tries to poke its ugly head through the $90 per barrel mark. Just a few months ago we had a scare that crude was going to $200 a barrel. If that were the case today, because they are compliments, new and used car buying would not be such a hot item in this ever wavering economy. Increased fuel prices would further hurt car manufacturers and cause more personal income dollars to go toward filling up at the pump.

Dr. Tufte said...

I don't know any specifics here, but the interrelationship within the fuel and auto industry tend to be really inelastic. So I'm not sure this would be too big an effect.

Sam said...

I think there is another economic factor that is influencing the higher prices of used cars in today’s economy. For many consumers a new car is out of the question because either they lack the cash to purchase a new car, or they lack the credit needed to acquire a loan to purchase a new car. Consumers that lack cash and credit effectively have a price ceiling that they cannot go above as they shop for a vehicle.

In our current down economy I think there are more consumers out shopping with these financial constraints and price ceilings. With these new price sensitive shoppers in the market out competing for lower priced “affordable” cars, the price of used cars has shot up. From what I have observed, the competition and value of used cars has become greater and greater as the price of the used cars gets closer to $0.

Dr. Tufte said...

Sam, this is an incorrect use of "price ceiling". I get the idea you're trying to get across, but when we talk about a ceiling we're usually talking about some involuntary constraint on transactions rather than the preferences of just buyers.

Believe it or not, what you are saying is that the demand for used cars has gotten more price elastic (I think we all agree that there's an income elasticity issue too). You've got the reasons down for the more elastic demand, but the effect is that more people are willing to walk away from a purchase (i.e., that demand is flatter).

Sam said...
This comment has been removed by the author.
Sam said...

Dr Tufte made a good point about price ceilings in the previous post. I was using the term incorrectly. After studying economic price ceilings more closely I found that an economic price ceiling occurs when a government puts a legal limit on how high the price of a product can be.

There are two types of price ceilings one binding and one non-binding. If a price ceiling is set below the free market equilibrium price it is binding and can lead to supply shortages. If a price ceiling is set above the free market equilibrium price it is considered to be non-binding, because the free market will already set the equilibrium price under the ceiling. I question the use of price ceilings by governments because they will either be ineffective, and therefore pointless, or will cause shortages which can lead to black markets and crime. There are currently no price ceilings set on used cars in the United States.

Dr. Tufte said...

Periods on abbreviations like Dr. are very close to something I should take points off for Sam. If the English didn't do this, I probably would ;)