What might be the effect of the prices of used cars on the demand for new cars?
Used cars and new cars are substitutes. Therefore, there is a direct relationship between the prices of used cars and the demand for new cars. A decrease in the price of used cars will result in a decrease in the demand for new cars while an increase in the price of used cars will result in an increase in the demand for new cars.
What is the effect of the high price of gasoline on the demand for new cars?
Cars and gasoline are compliments since cars need gasoline to function. Therefore, there is an inverse relationship between the price of gasoline and the demand for new cars. An increase in the price of gasoline will result in a decrease in the demand for new cars.
What factors are causing the decrease in the supply of used cars?
One of the factors causing a reduction in the supply of used cars is the reduced production of U.S manufactured cars due to the recession cutback by the U.S government. With fewer cars being manufactured, new cars will be expensive. Therefore, consumers will be less willing to sell their used cars in order to purchase new ones causing a decrease in supply of used cars.
The other reason is the expected shortage of Japanese made automobiles and auto parts. These expected shortages will bid up their prices deterring consumers from selling their used cars to buy new ones. This will cause a shortage in supply of used cars.
What factors are causing the increase in demand for used cars?
One of the factors causing increase in demand for used cars is the high prices of new cars due to the reduced production of U.S manufactured cars and the expected shortage of Japanese made automobiles.
The other factor causing increase in demand for used cars is the reduction in consumers’ income due to the recession. Additionally, the high population growth rate could be a factor causing increased demand for used cars.
References
McConnell, C. R., & Brue, S. L. (2012). Microeconomics: principles, problems, and policies (19 Edition ed.). New York: McGraw-Hill/Irwin.
Samuelson, P. A. (2000). Economics. Tata McGraw-Hill Education.
