ECON HL 002162-106
This article is about the effect on the local Detroit auto suppliers when the October monthly demand for new vehicles from General Motors, Ford and Chrysler, dropped substantially compared with that of the same time last year. This article presents many interesting points about Economics, and the concept of demand1 and supply2, income elasticity of demand, can be applied to this situation.
The supply failure of auto parts is mainly because of the remarkable drop in demand of the new vehicles due to the recession. Income elasticity of demand (YED) is a measure of how much the demand for a product changes when there is a change in the consumer’s income. The income elasticity of demand for vehicles, which can be classified as a superior good, tends to be high. In this case, when the consumer’s annual income decreased due to the recession, they stopped purchasing vehicles, which are non-essential, and shifted the demand curve for new vehicles from D to D1. Furthermore, consumers now have very negative expectations for the economy because of the recession. In this case, change in one of the determinants of demand called expectation, as when car buyers would not make such a commitment to own a vehicle when they can’t even secure their jobs. The unwillingness to purchase new vehicles during the recession from any of the local Detroit automakers also shifted the demand curve from D to D1. As a result of these changes, the new market equilibrium3 has gone down from P1Q1 to P2Q2. (See Fig.1), meaning that the market will be cleared at a lower price and quantity.
