Hybrid Cars - Assignment Example

Introduction: Gasoline prices have been ever increasing worldwide because of scar of oil. As put by Fried, Edward and Charles, with this consistent increase in prices, demand-pull inflation has raised all the price levels globally as all economies are directly or indirectly dependent on oil as it is a major source of fuel for both households and firms. Prices of inputs rise for the firms hence increasing their costs of production. This reflects into the prices which they charge from the consumers. The consumers are finally faced with high prices which puts a negative impact on their disposable income. Besides this, fuel prices also affect the household’s buying patterns as the consumers’ transportation expenses are directly linked with gasoline prices. Dijk and Yarime therefore rightly say in their journal that the consumers are constantly looking for cheaper fuel alternatives. Hybrid technology was introduced globally in late 90s. The history however dates back to the 20th century. Honda launched its Insight in the year 2000 after Toyota’s Prius hit the market in Japan in the year 1997. Nersesian rightly puts that there is a growing concern of rising costs amongst the consumers because of which, the demand of fuel efficient cars is rising. Besides this, governments are increasingly encouraging consumption of greener alternatives of oil as a fuel. The importance of hybrid cars is increasing day by day as not only it is cheap, but also fuel efficient and is environment friendly. It meets the concern of both the consumers, businesses and the environmentalists (Nersesian, 2007). 2 Supply And Demand 2.1 Role and Impact of Independent Variable The independent variable here in the Demand factor is the price of fuel. As Hybrid cars and fuel price are close substitutes, price of one changes the demand of the other. The price being the Independent Variable, Toyota Hybrid’s demand is solely dependent on the prices of fuel. As Diamond suggests that as oil becomes expensive, the consumers look for cheaper options to the extent, that they may dispose their low mileage vehicles and trade-in for more fuel efficient vehicles. The oil prices therefore, Khusid, stand as major independent variable which influences the demand of Toyota Highlander Hybrid. Besides its impact on demand, the producers also experience a rise in their costs of production because of which, they have to reduce their supply, which in turn increases the overall market price. However, as consumers switch to Hybrid cars, the demand curve shifts to the right, hence balancing off the price increase (Diamond, 2006; Khusid 2010). The price of the car itself however, remains the independent variable for the suppliers. As price is the motivating factor for both the household and the businesses, it remains the independent variable and hence, the major influence on both the demand and supply. Besides this, there are also hybrid conversion kits available in the market which makes it a lot easier for consumers to switch to cheaper alternatives (Nersesian, 2007). The price of hybrid conversion kits available in the market also influence how consumers respond towards Hybrid cars with fluctuations in prices of these conversion kits. If the prices fall, the demand of Toyota Highlander Hybrid is most likely to get inversely affected as the consumers will switch to a cheaper alternative. Therefore, another of the independent variable is the price of hybrid conversion kits. However, the price of conversion kits does not have a direct effect on the supply of hybrid cars as none of the factors which affect the supply gets influenced. This independent variable only has an impact on the consumer demand and therefore, the supply remains uninfluenced. The tax-rate on hybrid is also a pressure on both the supply and demand of Hybrid vehicles. The tax-rate on fuel efficient and eco-friendly cars is usually low as in incentive from the government for both the consumers and the suppliers to switch to the production and consumption of hybrid vehicles (Chupp, 2010). This means that both the consumer surplus and producer surplus is maximized and dead-weight loss because of minimized taxes. The tax therefore is another independent variable which determines the supply and demand of Hybrid vehicles. Khusid states that environmental concern amongst the educated and the high income gainers have led to a rise in the demand of hybrid cars. However those with less awareness tend to stick to conventional vehicles. Conversion of hybrid vehicles can be seen amongst those who are looking for savings on fuel by switching to cheaper alternatives. Those who can afford new cars, tend to buy fully fledged hybrid vehicles (Khusid, 2010). This shows that environment concern influences the demand of hybrid cars amongst those individuals, who belong to the educated upper class with high awareness and a sense of responsibility. Its impact on the supply however, remains week as the suppliers just respond to the demand and that, in order to meet the demand of the consumers influenced by environmental concerns and higher oil prices. The above diagram explains how the increases in oil prices, reductions in tax and environmental concerns will affect the demand. The demand will increase thereby, increasing the overall price of Toyota Highlander Hybrid. 2.2 Role and impact of Dependent Variable: A Dependent variable in the market of Toyota Highlander Hybrid is quantity demanded which gets directly affected with price changes. This means that as the price of Toyota Highlander Hybrid increase, the consumers are less willing to buy the vehicle. Conversely, if prices fall cetris peribus, the quantity demanded will increase. The demand directly depends on the price factor (Dikj et al, 2010). Besides the quantity demanded, the cost of production of the suppliers is another dependent variable according to Chupp, B, Katie Myles, and E Stephenson’s indication, which gets influenced when the government increases or decreases the taxes. Besides the taxes, when oil prices rise, it is likely for the firms to cut back on production as their costs of operating rise (Fried et al, 1975). Workers are made redundant as firms try to control their costs and hence, the supply curve shifts to the left. Demand on the other hand, does not get affected as firms’ costs of production rises. There is merely a contraction in demand with the result that the overall equilibrium output of the market falls as prices rise (Dijk et al, 2010). Quantity supplied is another dependent variable which is directly affected by the business environment in which a firm operates. Depending upon the availability of resources, prices of other alternatives, and demand in the market etc, quantity supplied is always dependent on all of these factors. The above diagram depicts a fall in the tentative supply curve after oil prices have risen which has led to an increase in the cost of production of the firm hence, leading to a fall in supply. Conversely, if the firms would have been subsidized, its costs of production would have decreased, leading to an increase in the supply curve (shown in the next demand-supply after taxes and subsidy diagram). 3 Allocation of Resources As stated by Fried, Edward R, and Charles L. Schultze that because of high demand of hybrid vehicles, the suppliers are increasingly allocating their resources from producing conventional gasoline run cars to producing more fuel efficient vehicles. Nersesian further goes on to say that firms are investing more on their research and development in bringing further innovations to the industry by giving greener and more fuel efficient alternatives to the consumer. Similarly, the consumers on the other hand respond as per their need. New buyers, who are educated and have more awareness, tend to purchase fully fledged hybrid cars whereas, the lower class consumers tend to look for alternatives such as converting kits etc (Nersesian, 2007). Since past, more and more companies like Ford, Toyota, Honda, and General Motors and even Porsche have invested in introducing hybrid cars (Diamond, 2006). In response to tax rebates from purchasing hybrid cars, both the consumers and the suppliers have shown willingness towards allocating their resources to hybrid cars. The following diagram depicts both the consumers’ and suppliers willingness to buy and sell hybrid cars. As the graph depicts, the supply of Hybrid cars is inelastic in the short-run as the production cannot be increased by merely hiring more labor. The demand however, shows an increase which, Chupp, B, Katie Myles, and E Stephenson mention, may be because of rising oil prices and growing concern of environmental issues amongst the consumers. As the demand curve moves to the right, equilibrium prices rise hence, shooting up the price. Simultaneously, with tax rebates and tax incentives along with subsidies from the government overtime, the supply curve moves to the right as well as their costs of production fall. This means that now, the suppliers are willing to supply more of the hybrid vehicles at given level of prices. With this, the overall prices fall and the new equilibrium can be seen at $80 price. The demand is also inelastic to an extent however the supply curve seems to be more inelastic as the production heavily depends on capital intensive methods therefore, the supply cannot be as responsive to price changes as other goods with labor intensive methods will be. Moreover, when the supply curve is observed, the gradient shows that the rise is steeper than the demand curve which indicates that the quantity supplied is less responsive to price changes. 4 Government Regulation As depicted in the above diagram, the government has introduced tax incentives for the consumers who switch to greener modes of fuel consumption. With this, the demand curve moves to the right as the consumers, not only to protect themselves from high oil prices but also to avail the tax redemption benefits from the government, switch to cheaper, greener and fuel efficient modes of transportation. Apart from the consumer demand, Chupp, B, Katie Myles, and E Stephenson assert that the government also encourages firms to produce more hybrid cars and devote more resources towards the production of these greener vehicles. As a token of encouragement for the suppliers, the government grants subsidies to car manufacturers to assist them in proving the economy with these fuel efficient vehicles. Due to this effect, the demand curve shifts to the right because of tax rebates and hybrids being cheaper alternatives. The consumers now demand more of hybrid vehicles because of better mileage and low taxes which they have to pay to the government because of lesser emissions their vehicles are causing in the environment (Dijk et al, 2010). As far as the supply side is concerned, Dijk, M, and M Yarime state that subsidies help firms to finance price incentives to pass on to the consumers. The government pays for the profit which the firms have to forego because of reducing their prices. The supply curve tends to shift to the right as more could be supplied at given level of prices. Besides directly affecting the demand and supply of hybrid cars, the government also has an influence on the resources of car manufacturers who are manufacturing and marketing hybrid cars in the economy. The growth of hybrid cars, as put by Johnson, L, M Wang, D He, and H Huo, has mainly been because of government intervention which requires the manufacturers to produce vehicles with lower CO2 emission. The firms, because of this, have been spending vast amounts in research and development the product of which, is marketing hybrid cars. The government aids car manufacturers by either providing them subsidies, or by reducing duties and taxes on major resources which are required to produce them. 5 Future Prediction In the near future, there is yet a lot of room for Toyota Highlander Hybrid to grow in the international markets as Fried, Edward R, and Charles L. Schultze state that the oil, being a global commodity, is getting expensive for every consumer in the world. Most of the hybrid models, as Diamond says are only limited to certain markets of some countries however, local production in other parts of the world where Toyota has manufacturing plants, could be commenced and the product may be marketed across countries. World demand is expected to increase with inflationary pressures caused by oil prices along with rising environmental concerns amongst people to fight pollution as both Nersesian and Khusid point out. Supply on the other hand, is also expected to rise in order to meet this rise in demand. Also, current data shows that companies are increasingly devoting their resources to production of Hybrid Cars and moving away from conventional vehicles for the household market (Diamond, 2006). According to Johnson, L, M Wang, D He, and H Huo in their publication, increasing concerns of the government about CO2 emissions in the country are leading to more and more emphasis being laid on what firms produce and how they produce. Government has set taxes in accordance with minimum acceptable gas emissions and wastage for factories exceeding which, makes them liable to pay heavy taxes and fines (Chupp et al. 2010). Similarly, car manufacturers face with restrictions as per the level of CO2 which their cars could emit. This has led to a focus on hybrid cars which are not only fuel efficient, but are also environment friendly. In future, there will be more focus on hybrids as the oil prices will continue to rise and the consumers will continue to look for cheaper and cleaner options (Johnson et al, 2006). Works Cited Fried, Edward R, and Charles L. Schultze. Higher Oil Prices and the World Economy: The Adjustment Problem. Washington: Brookings Institution, 1975. Print Dijk, M, and M Yarime. "The Emergence of Hybrid-Electric Cars: Innovation Path Creation Through Co-Evolution of Supply and Demand." Technological Forecasting and Social Change. 77.8 (2010): 1371-1390. Print Chupp, B, Katie Myles, and E Stephenson. "The Incidence of Hybrid Automobile Tax Preferences." Public Finance Review. 38.1 (2010): 120-133. Print. Nersesian, Roy L. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources. Armonk, N.Y: M.E. Sharpe, 2007. Print. Diamond, David; A. P. The Determinants of Hybrid-Electric Vehicle Adoption: Insights from State Registration Data. , 2006. Print Khusid, Michael. Potential of Electric Propulsion Systems to Reduce Petroleum Use and Greenhouse Gas Emissions in the U.s. Light-Duty Vehicle Fleet. , 2010. Print. Johnson, L, M Wang, D He, and H Huo. Projection of Chinese Motor Vehicle Growth, Oil Demand, and Co{sub 2}emissions Through 2050. Washington, D.C: United States. Dept. of Energy, 2006. Print. 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