“In the past, nothing slowed down strong car sales faster than a spike in gasoline prices. ” Gasoline and normal cars are strong complements because gasoline is necessary for cars to operate and forms the large bulk of the cost of owning a car. The quantity demanded for cars decrease more than proportionately to the increase in prices of gasoline. “These days, consumers simply switch to more fuel-efficient models.
The choices for fuel efficiency are so plentiful it’s harder for a consumer to walk away because of gas prices… ” A likely reason for this could be that fuel efficient cars save on fuel consumption, thus leading to possible savings on gas prices in the long run. Therefore, when gasoline prices rise, demand and sales for fuel-efficient cars increase. Sales of small-cars also increased when gasoline prices rise, as small cars consume less fuel, thus saving on gasoline costs. The overall strength of the American market prompted Ford to announce it will build 725,000 vehicles…during the fourth quarter, a 7% increase from the same period a year earlier. ” Reasons accountable for the increase in sales of fuel-efficient cars are partly due to the rising demand of Americans’ need to replace older vehicles as well as the wider range of fuel-efficient models being available in the market. As discussed above, the rise in gasoline prices have prompted an increase in demand for fuel-efficient cars.
Thus, as demand shifts from D1 to D2, there is an upward pressure on prices of fuel-efficient car, from P1 to P2. Therefore this may explain the rationale for Ford Motor to increase the quantity supplied of fuel-efficient cars to cope with the increased demand. Ford’s expectation of the price increase brought about by the increase in demand for fuel-efficient cars will result in a movement along the supply curve, indicating an increase in quantity supplied of cars.