The Economics of Automobile Sales Essay

The Economics of Automobile Sales

Introduction

    In the most basic sense, the buying and selling decisions in a free economy come down to the buyer or the seller’s selection of the option that benefits them most.  This is true from the fictional widget that is discussed in the classroom to big ticket tangibles like automobiles.  Specifically, this paper will discuss the effects that Microeconomics focuses on the role consumers and automakers play in the economy, with specific attention paid to how these two groups make decisions in buying and selling automobiles.

How Individuals Make Decisions Based on the Concept of Utility

     If one were to ask a group of ordinary people at random about the factors that influence their purchase of major items like automobiles, these people would very likely say that their decision is based upon price, styling, handling and the like, but the reality is, from a Microeconomic standpoint, individuals make buying decisions based on the concept of Utility.  Since this concept is rarely given a second thought outside of the classroom, it is worthwhile to discuss in this research what the concept of Utility is, and how individuals make decisions based upon it.

     Simply stated, Utility, from a Microeconomic viewpoint, is the relative benefit or pleasure that an individual derives from choosing one product over another (Else & Curwen, 1990).  In the case of an automobile, if the buyer thought according to Utility theory, the buyer would choose the vehicle that answered specific needs of the buyer, whether that need was enough interior space to carry a large family, fuel economy, or even something more superficial such as prestige in buying an expensive automobile that will gain the buyer some level of recognition that they crave.  Utility, while exhibiting different attributes to different people, comes down to the buyer saying “what’s in it for me”?

How Businesses Make Decisions Based on the Competition They Face in the Market

     Like the individuals who may or may not buy their products, businesses make decisions based on many factors.  For businesses, decisions are made based on the competition that they face in the market.  To be specific, in reflecting back on more basic Microeconomic theory, businesses will put a product on the market at a price that exceeds their cost of making the product- simply put, profit.  When a company has a product that few or no competitors offer, assuming that there is a demand for the product, that company would be assumed to generate a profit and would continue to offer the product.  However, when competitors enter the marketplace, a theory known as the Law of Diminishing Returns may influence the decision making process of companies.  In short, this Law states that when a company sees its profits shrinking on a given product due to increased competition, decreased demand or rising production costs, the decision to pursue other opportunities may be made (Burkett, 2006).  This type of situation in regard to automobile sales can be seen in a quick review of the global automobile industry over the past several decades.  For American automobile manufacturers, the huge, heavy gas-guzzling cars that they produced for decades began to generate less profits at one point because consumer tastes had changed, and the smaller, more fuel-efficient cars being made by competitors in other nations were what was selling, and because the massive American cars were not selling, the American manufacturers were forced with the choice of either making a different design of automobile, or face the consequences.

     How Both Individuals and Companies Use Opportunity Cost in Decision Making

     Opportunity Cost is yet another Microeconomic theory which relates closely to the previously discussed Law of Diminishing Returns, applying equally to individuals and companies alike.  In either case, Opportunity Cost comes down to the fact that there are unlimited wants and limited resources available to fulfill those wants (Weirich, 2001).  Companies, of course, want to earn as much profit as possible, but only have a limited amount of personnel, equipment, raw materials, capital and time to devote to gaining that profit.  Likewise, individuals may want to earn as much money as possible but have limited time to devote to work, may have limited marketable talents, etc.  Or, individuals may paradoxically want to have as many of the luxuries of life as possible, but have limited money to obtain them.  Applying this phenomenon to automobiles, the makers of automobiles would of course, in a perfect world, want to produce as many different models of cars as possible, in unlimited quantities so that they could sell as many units as possible and make as much profit as possible.  On the other hand, the individual consumer would of course like to own as many different types of expensive automobiles as possible, but is limited by finances and the like.  Therefore, in either case, Opportunity Cost becomes highly relevant, as companies and individuals must choose, given limited options, those selections which will maximize the positive outcome.

Conclusion

     In exploring the economics of automobile sales, not only has that topic been better understood, but also it has revealed something about human nature, modern business and the world itself.

References

Burkett, J. P. (2006). Microeconomics: Optimization, Experiments, and Behavior. New York: Oxford University Press.

Else, P., & Curwen, P. (1990). Principles of Microeconomics. London: Unwin Hyman.

Weirich, P. (2001). Decision Space: Multidimensional Utility Analysis. Cambridge, England: Cambridge University Press.