Introduction
The analysis and focus of this outline relate to the article by Adrienne Roberts published on the 23rd of September, 2018 in The Wall Street Journal. In recent years, the car has become a necessity in most parts of the United States, and the country has always taken pride in its production of new cars from the factories. Nonetheless, the last few years have seen the prices of new cars continue to rise, while the disposable income of consumers has stagnated or grown marginally. Consequently, there has been a need for clients to seek feasible alternatives within the industry, and the shift has gone to the used car market. The car market has seen an increasing gap between the prices of new and used cars in the United States. This industry is experiencing a shift in the demand of consumers as more buyers shift towards used car lots than in previous years.
The demand for used cars in the United States has been unusually strong this summer and expectations are that it will remain high throughout the year. The used car dealers have also increased their selection as they moving from just the slow-selling sedans towards the crossover and sport utility vehicle models whose demand is on the rise. Additionally, the dealers also agree that some of the clients who would not have considered buying used cars in the past are now driving off with preowned vehicles. The used car market has grown to more than double the size of the new cars market. There is an increase in the demand for used cars mainly due to the increase in the price of the new cars, which are the substitutes, and an increase in the supply of used cars, which are still in good condition. This outline will make an analysis of the shift in demand in the used car market and also make a few comparisons do my powerpoint presentation for me with the new car market since they are closely related.
Model of Consumer Choice
The shift in demand that is being experienced in the used car market can be best explained through the income and substitution effects of a price change. When there is a change in the price of a good in the market, there are two effects in the consumption that are experienced. When there is an alteration in consumption as a result of a change in price, the two factors come into play. First, there is the income effect, which is experienced when the price of a good falls, and the real purchasing power of the consumer increases, and this impacts the consumption of the good. As a result, the consumer attains a higher indifference curve. This would require a movement in the disposable income that the consumers have, and it would result in an increase in the demand for the commodities that they would have not been able to purchase before. The income effect tends to allow the consumers to demand some of the commodities that were previously in a higher income bracket.
On the other hand, there is the substitution effect, which occurs when the price of one good either rises or falls, which results in the consumer having the incentive to increase their consumption of that good or the other. The consumption pattern of the consumer gets altered and it changes in favor of the less costly good and moves away from the other relatively more expensive good. The changes in the consumption pattern result in the consumer’s real income and it results in the attainment of a greater level of well-being. It allows the budget line to move outward and this allows the consumption of items that had less consumption level, earlier. Similar to the normal reactions in the laws of demand and supply, when the price of a commodity increases, the first reaction by the consumers is usually to seek alternatives, which are the substitutes, which are at a lower price but of reasonable quality in order to satisfy their need. Therefore, it is expected that when such an occurrence takes place, there will be an increase in the demand for the substitute while the demand for the original product reduces. Therefore, the consumers substitute the original highly-priced product for a cheaper alternative that is available in the market.
Different factors impact on the shift in demand and as indicated in the example below, there is a shift in demand due to an increase in income. Chart 1 indicates the original price and quantity demanded.
Chart 1: Demand curve
Supposing that there is an increase in the income of a consumer, there will be an additional retainer that they can easily dispose of by demanding more of the product at the same price. As such, they are able to increase the quantity that they can purchase at the given price, which in turn increases the demand for the product, and shifts the demand curve upwards or rightwards. Chart 2 shows the shift in demand supposing the consumer’s disposable income increases. In this case, the consumer is able to purchase more in order to extract additional satisfaction for their need. In case other factors were in play and the price of the product increased, the consumers would reduce their demand for it, and potentially shift to an alternative product, whose demand would increase. Furthermore, decreased income would mean that there is a budget constraint for the consumer and this would result in a shift in the demand to a substitute product if one is available.
Chart 2: Increased Income Causing Increased Demand
Model Application
The used car market in the United States has experienced a shift in demand. There has been an increase in the demand for used cars in recent years, which has been attributed to a variety of reasons. This year has seen the demand for new vehicles start cooling off after a seven-year growth streak. The prices of new cars have been increasing, and it has become difficult to get a 0% financing rate on loans. One of the reasons why buying new cars was attractive was the low prices and easily accessible 0% financing rate on loans going up to 60 months credit period. Consequently, it has become more expensive for people to access new cars, and they have shifted to used car models. As a result, there is also an increase in the supply of used cars due to an influx of off-lease cars, and a slowdown in the repossessions. When making a decision to purchase a vehicle, several issues come into play, but one of the main aspects includes the condition of the car and its price. It is always important for the person buying the vehicle to feel that they are receiving value for their money. The fact that people are no longer holding one vehicle for their use for long means that there is no need to make hefty investments in a vehicle that one will dispose of within a short time and purchase another one. Consumers have realized that some of the vehicles that are new in the current market and their prices are above their budget will become available to them as used cars in a few years. Within that time, the value of these vehicles will have dropped significantly and they will manage to purchase at the time. Chart 3 shows how the demand for used cars has shifted in the United States as a result of the substitution effect resulting from an increase in the price of new cars.
Chart 3: Demand Shift for the Used Cars
There is a notable increase in the demand for used cars mainly due to the increase in the prices of new cars, which has been partially attributed to the increase in interest rates. Although the last few years have seen the value of used cars increase, the gap between the prices of new and pre-owned cars has been widening, and it is currently at the highest level in the last decade. There has been a steady climb of new car prices in recent years since the recession as car manufacturing companies make their vehicles with new and expensive technologies, and the clients have shifted their demand from lower-priced vehicles to sport-utility vehicles. The automakers are no longer offering high discounts to the buyers, and the strict credit terms have tamed the consumer demand for used vehicles, hence the decline in the sales of the new vehicles. As a result of the lucratively priced new cars, consumers have been forced to look for alternative options in high-quality used cars. It is a great substitute for the purchase of new cars. In addition to the price of used cars being lower than that of new cars, there has been an increase in the volume of used cars in the market. One of the reasons for the increase in used cars is the shorter ownership periods for cars. Car users are no longer holding onto their vehicles for as long as they used to in the earlier years. As a result, there is an increase in the availability of used cars. Therefore, the used cars released in the market are considerably new due to the reduced usage time. There are numerous other potential car owners in the market who would prefer to use these cars. The demand of consumers has also changed in the United States. As such, consumers are becoming additionally cautious about the value that they gain with big purchases. The major movers and reasons for the choice of used cars by the consumers include the high price of the new cars, and the increased supply of the used cars. Chart 4 shows the shift in the demand for used cars as a result of the increase in prices of the new cars, and thus the substitute effect takes effect. Point A shows the original demand at the same price, and point B indicates the increase in demand to D1 as a result of substituting the new cars for the used cars due to an increase in the price. On the other hand, Chart 5 shows the budget line indifference curves indicating how the demand for used cars gets derived as a result of an increase in the demand for new cars.
Chart 4: Demand Choice and Consumer Preferences
Chart 5: Indifference curve and budget line indicating the shift in demand of used cars compared to new cars.
The majority of the manufacturers of new cars especially in Europe and the United States have their focus on the manufacturing of Sport Utility Vehicles (SUVs) and crossovers. As a result, these vehicles have been on the increase in the market. However, their prices continue to rise due to a variety of reasons including higher production costs and imposition of tariffs. Consequently, highly-priced vehicles have become less competitive in the market. Furthermore, these SUVs have a high consumption of fuel. Fuel prices have been on the increase in the last few years, and it has become less interesting to own an high-consuming vehicle for personal use. Therefore, the demand for lowly-priced and low-consumption vehicles has increased. Potential customers have found the need to invest in cheaper alternatives that will solve their problem of mobility. As a result, the increased number of used vehicles in the market has found a market, and their demand has been on the increase. These vehicles are resolving the needs of the consumers in a variety of ways. The vehicles ending into the market have only clocked a few thousand miles, and they are still in good condition. Therefore, consumers have found it ideal for them to purchase such vehicles in order to meet their demand. Furthermore, as newer used vehicles get into the market, they can offload their current vehicles and change for these new models.
Conclusion
The demand for used cars is on the increase in the United States. Consumers have shifted from the new cars to the used models due to the increase in new car prices. In line with the economic model of consumer choice, they change their preference and shift towards the use of used car models. They are cheaper and will serve to satisfy their need for an automobile. Nonetheless, there is still an increase in the supply of cars due to an increase in the off-lease cars and reduced repossessions. If the trend continues, depending on whether the supply or demand maintains the surge, prices could either increase or reduce. Although the price of used cars has also been increasing, the gap between used and new cars continues to increase. The prices for the used cars continue to rise, but only marginally. Their increase is not comparable to what is being experienced in the new car market. Furthermore, the preferences of the people have also shifted, which indicates that the potential for growth in the used cars market is also increasing. The need for a new car is no longer the main driver for the people as they buy their vehicles. The automotive industry has increased the frequency of the introduction of new technology on different models of cars. In order to take advantage of the same, the consumers have also shifted their focus and they no longer retain one car for long. As a result, it is not feasible for them to invest in a highly-priced new car, which they will need to update in a few years. Instead, they are shifting their focus on used cars, whose prices are low, and they can change them easily with new models of used cars. These changes mean that the new cars lack the demand that they had in earlier years. Consequently, more consumers are substituting their demand for new cars for used cars, which has led to an increase in the demand for used cars. The clients have found an alternative for the new cars in the used car market, and they feel that they are receiving value for their money, which is the main factor of consideration.