Viability of the Automobile

Executive Summary

First, I will present the viability of the automobile, considering the demand cost, market conditions, and economic conditions in this executive summary. Next, this paper will examine automobiles in several perspectives: product pricing, cost, market structures, and economic forecast. With that said, the demand costs are relative to many other factors such as income, cost of substitutes and compliments, exchange rates, unemployment, and other economic indicators. The market conditions are realized by looking at economic indicators such as the price of oil, the strength of the dollar, unemployment, and GDP. It also deals with equilibrium, which is (October 2005) now an excess supply of automobiles causing fancy sell tactics such as 0% financing, employee dealer pricing, and lots of free upgrades. These are measures taken from the downward pressure on price, to help equalize supply and demand of automobiles. This is the demand cost of automobiles to the US market. I have noticed quite a change in economic conditions as well, such as substitutes and complements price changes and the introduction of hybrid powered automobiles.

Product Pricing Component

In terms of the product pricing component automotive sales are reflected by several factors such as the current high cost of gasoline (compliment), the availability and price of bus tickets and taxi’s (substitutes), and the utility use of automobiles to the immediate consumer and need to get around town for personal or professional use. Additionally, the demand for automobiles in the short run is to some extent elastic, because the purchase of new vehicles can often be delayed. Additionally, when the consumer demands a specific automobile (make and style) this is an example of demand elastic, because there are so many substitutes. See Table 5 in Appendix A to see estimated price elasticities of demand for a variety of consumer goods and services. Over the long run, the demand for automobiles in rural areas would probably be inelastic, since there are few alternative modes of transportation (Mackinac Center for Public Policy, 2001).

This particular product transports people to and from places, both short and long distances. Some consumers must use automobiles to work and live, while some consumers may be able to use substitutes. With the increase of oil prices, insurance, and other automobile complements, consumers increase demand for substitutes like mass transit, bus use, taxis, and walking. Large communities enjoy these substitutes while small communities don’t have all or some of the substitutes available.

Unfortunately the main issues that affect consumer demand and the price of an automobile is the price of compliments, and as the cost of oil increases it forces consumers to cut spending on less essential items like eating out or entertainment. In a more serious situation, minimum wage workers and senior citizens living on fixed income must deal with the higher cost of gasoline, by cutting back on critical expenses such as food, clothing and medicine.

Based on the above information, strategies to enhance revenue require focusing on fuel efficient vehicles like hybrids and economic cars. I also recommend marketing and advertising economical cars instead of the gas guzzlers that are not fuel efficient. That is how I plan on increasing revenue in these trying times of high compliment prices relative to the automobile.

Cost Component

Issues that affect cost relative to automobiles are price of raw materials, exchange rates, labor markets, and advertising (Investopedia.com, 2005). First, the cost of raw materials like steel, aluminum, rubber, plastic, and fabric reflect directly on cost. If the price for steel increase the cost of an automobile increases. It’s all relative. Second, the exchange rates impact sales relative to import and export pricing. When the dollar is weak against the yen the Honda and Toyota cars are more expensive. When the US dollar is stronger against the Yen, Honda and Toyota are more expensive. This is relevant to the affect of cost. Labor markets affect cost because it requires lots of work to make and produce automobiles from the planning and designing to the creating and assembly. When labor cost increases that charge is passed along to the consumer, so the price of automobiles increases as well. Finally advertising impacts cost because automakers spend billions on print and broadcast advertising (Investopedia.com, 2005). This expense includes forecasting consumer patterns and anticipating buyer’s tendencies. Overall, issues that affect cost are discussed above, and ultimately these costs are passed to consumers through price.

The impact of technology on productivity and average total cost can be offset by automation and changing variable