Demand And Supply Of Cars In Australia †Myassignmenthelp.Com

Question: Discuss About The Demand And Supply Of Cars In Australia? Answer: Introducation The Australian car industry has undergone a series of changes over the past few years. However, throughout this period, the Australian people remain a nation of car lovers. According to Greg Jericho (2017), people within the country love to purchase new cars despite the fact that the countrys wage growth is low. Today, the nation ranks top ten on the list of car loving countries in the world. Notably, the prices of new motor vehicles have not risen significantly since 1995. As a result, individuals are motivated to take advantage of the low prices and thus, end up purchasing more cars. In the same way, the Australian Bureau of Statistics reports that many consumers in the country are ready to spend on a new car despite the low wage growth experienced in the country. Markedly, there is an unusual relationship between the rate of new car sales and the wage growth in the country. Price Elasticity of Demand It is imperative to note that the relationship between the wage growth rate and the demand for new cars in the country can be explained using the demand elasticity and supply elasticity models. Fundamentally, the law of demand postulates that a change in the price of a commodity brings about variations in the quantity demand of that product. In the same view, price elasticity concepts are used to measure the responsiveness of demand to changes in the price of a good. Noteworthy, motor vehicles have a demand that is price elastic. Mainly, this is due to the fact that it is a luxury good. For this reason, a small change in the price of the commodity results in a bigger percentage change in its demand. In correspondence, the price of new cars in the country has remained relatively stagnant over the past few years. That is to say, the price level of automobiles in Australia has remained constant and, thus, the demand for the commodity has also remained constant over the years. Graph showing relationship between price and quantity of cars demanded Source: (Economics Help, n.d.). From the graph, one can note that a unit change in the price of a motor vehicle would lead to a unit change in the quantity of the commodity demanded. Usually, there exists a direct correlation between the price of a luxury good and its demand. In this case, the demand for vehicles in Australia is high because the price of the good has been relatively constant over the years. For instance, a new Toyota Camry in 1995 was sold at $23,910. Surprisingly, the same model today costs approximately $23,990 (Jericho, 2017). It is worth noting that the price of the car has risen by only $80 dollars over the years (Jericho, 2017). Owing to the constant nature of the price of cars in the country, its demand has remained over the years. Additionally, one can attribute this to the fact that the Australian people view the price of the commodity as relatively affordable despite it being a luxury product. Price Elasticity of Supply Just like demand, supply is responsive to changes in the price of a commodity. Ordinarily, an increase in the price of a product motivates a manufacturer to supply more of the commodity (Pettinger, 2011). Thus, when the supply of a commodity is price elastic, a small rise in its price results in a larger than proportion rise in its supply (Economics Help, n.d.). It is imperative to point out that the supply of motor vehicles in the country is relatively inelastic. Thus, a big variation in the price of a car results in a small change in the quantity of the product supplied. Graph showing relationship between price and quantity of cars supplied Source: (Pettinger, 2011). Fundamentally, the inelasticity of supply occurs due to the fact that raw materials used in the production of cars are usually fixed in supply. For this reason, it is impossible to raise the supply of cars over the short term period despite significant changes in their prices. Besides, the constant nature of the price of cars in Australia over the past years has ensured that manufacturers in the country produce a consistent number of vehicles over time. Consequently, this has ensured a continued supply of the commodity, ensuring that prices remain low. Correspondingly, the predictable prices have ensured a relatively stable but high demand for the commodity. Income Elasticity of Demand Additionally, it is useful to note that the income elasticity of demand of a commodity plays a significant role in its demand. Indeed, the demand for motor vehicles in Australia rises more than proportionately following changes in the wage level. As such, a small increase in the income earned by Australians results in a large increase in the demand for the commodity. In this regard, Jericho (2017) notes that although the wage growth in the country remains significantly low, the demand for vehicles in the country remains high. Mainly, this can be explained by the fact that automobiles are luxury goods and, thus, possess an income elasticity of demand of more than one. In turn, the low wage growth does not hinder Australians from purchasing new cars. All in all, all factors taken into consideration, the Australian motor vehicle industry is characterized by an unending love for new cars despite the fact that the wage growth in the country is relatively low. Primarily, the situation prevails because cars have a relatively high price elasticity of demand. In addition, the product has a relatively inelastic price elasticity of supply and, therefore, there is a constant supply of the commodity in the country. Moreover, the income elasticity of demand of the product is relatively high. All these factors combined have led to the sustained love and appreciation for new vehicles in Australia despite the low wage growth in the country. Reference List Jericho, G. (2017). Australians still love buying new cars, even when wage growth is low. [Online] The Guardian. Available at: https://www.theguardian.com/australia-news/grogonomics/2017/aug/01/australians-still-love-buying-new-cars-even-when-wage-growth-is-low [Accessed 14 August 2017]. Khan, S. Elasticity of supply. [Online] Khan Academy. Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/v/elasticity-of-supply[Accessed 14 August 2017]. Pettinger, T. (2011). Different types of goods Inferior, Normal, and Luxury. [Online] Economics Help. Available at: https://www.economicshelp.org/blog/790/economics/different-types-of-goods-inferior-normal-luxury/[Accessed 14 August 2017]. Price Elasticity of Demand (PED). [Online] Economics Help. Available at: https://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand/[Accessed 14 August 2017].