Factors that Affect the Demand and Supply of Cars - Essay Example

This paper will look at factors that change the supply and demand of cars, possible substitutes that could be used in place of a car, goods that complement cars, and also how cars affect price elasticity. These days, cars are produced in the cheapest places possible. This could be anywhere on earth, but is usually in a country where the labor is cheap and the technological knowhow is in place. The production of cars can change due to a number of factors. One of these is natural disasters. In flood-prone countries that produce cars, such as Thailand, any environmental catastrophe can cause car factories to shut down for an extended period.

Apart from affecting the local workers, the price of car can also increase in a country such as America. Because production ceases, the supply of cars also decreases. This inevitably forces the prices of cars up because car companies need to reach a certain level of profit to function as a business. Another factor that could alter the supply of cars is technology. If new technology was discovered that allowed the production of more cars for less, the supply of cars would increase dramatically.

This would have the opposite effect of an environmental disaster; the price of a car would fall due to there being an oversupply of cars on the market. In terms of factors that could cause changes in demand, an economic recession would be the most obvious one. The current recession that is affecting the world has reduced demand for cars, although not by much. This is because cars are an essential item for most people, so they have to choice but to continue to purchase cars. Conversely, a rise in people’s incomes would cause the demand for cars to increase.

This is because the average consumer would have extra money in their pockets, resulting in more cars being purchased. Because cars are an essential part of our society, there is a very limited supply of substitutes available. The substitution effect states that demand is not related to any shift in income (Krugman and Obstfeld 89). This is unlike the income effect, which states that there is only a shift in demand when there is an increase or decrease in income. Because of the competitive market, there will always be substitute products available.

For cars, one substitute may be a form of public transport such as a train or bus. This is more likely to occur during hard economic times because people would not be able to afford to drive a car. Because of this, the most likely option to turn to is the public transport system because it is cheaper than running a car. Thus, there would be increased demand for public transport. This makes sense because whenever there is a decrease in the demand for a product, there is generally an increase in demand for a substitute product.

Another substitute that is comparable to public transport is a motorcycle. This is cheaper to run than a car, but can be less expensive than a train or bus. One of the downsides to a motorbike is that there is no cover when it rains. However, for those people who cannot afford a car, a motorbike is a realistic option. Just as in public transport, whenever there is a decrease in demand for cars, there will be an increase in demand for motorbikes. Whenever there is a change in the demand or supply for cars, there is a corresponding in the prices of compliments.

One product that is a compliment of cars is tires. Because tires are an essential part of any car, their importance is linked with the performance of cars. When there