Supply and Demand

The law of supply and demand involves human behavior. When supply is high and the demand is low, costs will drop. When supply is low and demand is high, prices will increase. A factor that plays a role in the economy is the invisible hand. As consumers our actions are guided as prices rise or fall. An example would be increasing fuel prices. When the price of fuel increases, motorists, bus companies, taxi companies, and airplane companies all have to make up for the increased cost. They have to pass some of these costs onto consumers. Another area affected by the increase in fuel cost is the sale of automobiles. With high prices, smaller cars with better miles per gallon are favored over gas guzzling SUV’s. Hybrid cars are in high demand because of their increased mileage. “Due to their increased fuel efficiency, hybrid cars are able to travel much further than fossil-fuel driven cars “ (http://web.ask.com/, 1). Supply and demand plays a huge role in the automotive industry. It is greatly affected by fuel prices and in order to try to get business, many automotive dealers pass on incentives to their customers.

Gas prices have been on a steady rise all year increasing anywhere from $1.00 to $2.00 a gallon. Due to this rise in prices, consumers are looking for ways to cut back in other areas. One way of doing this calls for purchasing more fuel-efficient vehicles. “One out of six percent of car buyers have already changed their mind about what vehicle to purchase as a result of high fuel costs” (www.nbc4.tv/, 1). Not everyone is affected by the rising cost, so they will continue purchasing larger vehicles. But for those who feel the effects, they are looking to their automobile dealers for more fuel-efficient and in some cases, environmentally friendly vehicles.

Times of increasing prices affect everyone differently. Not surprisingly, income levels make a difference in how consumers respond to rising fuel costs Certain parts of the population will feel the effects of skyrocketing fuel prices more than others. Lower income households will bear more than their share of the rising prices' impact. “Seventy-six percent of lower income respondents reported that they will drive less. Respondents with lower incomes were about 50 percent more likely to be actively looking to change their vehicle to a more fuel-efficient model than their higher income counterparts” (www.DuluthNewsTribune.com, 1).

What is an automobile dealer to do in these times of high fuel prices? Sales are falling on their money-making automobiles, as they still sit in the lots, not as highly favored as in the past. As with most companies in this situation, offering a sale or incentives helps when sales are down. One of the biggest incentives offered this year by just about every automobile dealer was “employee pricing.” This makes consumers feel as if they have to get an automobile, since they will not see a deal like this again. Pricing on vehicles they may have considered to be out of their price range, may now be more affordable, therefore more appealing. Even with increased fuel prices, if they can get a new vehicle for a steal of a price,