Friday, March 6, 2015

Supply and demand in action in the used car market

The article is a great application of supply and demand.
  1. What is happening to the supply of used Leafs? Why?
  2. What is happening to the demand for used Leafs? Why?
  3. How would these changes affect the equilibrium price of used Leafs?
TOPICS: Supply and Demand
SUMMARY: With gasoline prices down 33% from a year ago and buyers cooling toward electric vehicles, Nissan dealers worry that weak demand for used electric Leaf cars will put a flood of used models on the market.
CLASSROOM APPLICATION: Students can use supply and demand to examine the effect of lower gasoline prices and federal incentives to purchase new electric vehicles on the demand for new and used plug-in electric vehicles. Instructors can highlight that new and used versions of a vehicle are economic substitutes and that a decrease in the price of one reduces the demand for the other. Another interesting point noted in the article is about the effect of decreased used-car prices on the profits of auto leasing companies. Students can evaluate the relationship between used-car prices and equilibrium lease rates.
QUESTIONS: 
1. (Introductory) What factors are driving the decreased demand for used plug-in electric vehicles?

2. (Advanced) How does the sale price of an automobile coming off a lease affect the profit of the company that leased the car? In turn, how do these resale prices affect lease rates?

3. (Advanced) How does the demand for used plug-in vehicles affect the equilibrium prices of new plug-in vehicles?
Reviewed By: James Dearden, Lehigh University

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