South-Western College Publishing - Economics  
The Golden Age of Cars 'n' Trucks
Subject Comparative Statics
Topic Equilibrium
Key Words Sales, Demand, Population, Producers, Stock Market, Interest Rates, Technical Progress, Costs, Price
News Story

Auto sales were the second highest ever in 1998, indicating a new golden age for the industry. However, it is different from the heyday of the 1950s, when demand was boosted by a booming economy and population growth, and there were too few cars supplied.

In current times, while demand is high, there is an overabundance of cars. Demand is being fueled by the strong economy and stock market, low interest rates, and appealing features on newer models. Producers are using technical progress to design new cars quicker and more cheaply. They are also using the same parts to make different types of cars, thereby reducing costs.

The effect is that the prices of new models are not rising in spite of their new features and extras. Some, like the Jeep Grand Cherokee, are actually being reduced in price. The older models, like the Ford Taurus, are being discounted even more steeply.

(Updated February 1, 1999)

Questions
1. a) Draw a supply and demand diagram of the market for automobiles in the U.S. Mark the equilibrium price and quantity.
  b) In the 1950s the booming economy contributed to the high demand for autos. Which determinant of demand changed?
  c) Illustrate the effect of the growing economy and population on the demand for autos. Show what happened to equilibrium sales and to the equilibrium price of automobiles.
2. a) Draw a diagram of the modern-day market for new car models and show the equilibrium price and quantity.
  b) Computers have made it easier to design new models cheaply, while using the same parts as are used in other models has reduced costs. Show the effect of these two developments on the equilibrium price and quantity of cars bought and sold.
  c) At the same time, interest rates have been lowered. What kind of good is auto finance? When its price decreases, what happens to the demand curve for cars?
  d) Show the effect of cheaper finance, the booming economy and the tastes of consumers for fancier model features on the equilibrium price and quantity of cars?
  e) Overall, prices stabilized or fell slightly in 1998. What is the reason, given your analysis above?
3. The market for older models, like the Taurus, saw bigger price declines.
  a) Consider why this might have occurred in view of your analysis in Question 2.
  b) In a diagram of the market for older car models in 1998, show what happened as a result to supply and demand and therefore to equilibrium sales and prices.
4. How is the current golden age different from that of the 1950s? Answer based on your analysis of the 1950s and 1998 in Questions 1 and 2.
Source Gregory L. White, Fara Warner, and Joseph B. White, "Competition Rises, Car Prices Drop: A New Golden Age?", The Wall Street Journal, January 8, 1999

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