Question

Consider the market for cars. Which determinant of demand is affected by each of the following events? Choose from: consumer preferences, prices of related goods, incomes, expectations, and the number of buyers. [LO 3.2] a. Environmentalists launch a successful One Family, One Car campaign. b. A baby boom occurred 16 years ago. c. Layoffs increase as the economy sheds millions of jobs. d. An oil shortage causes the price of gasoline to soar. e. The government offers tax rebates in return for the purchase of commuter rail tickets. f. The government announces a massive plan to bail out the auto industry and subsidize production costs.

Short answer

a) Preferences, b) Number of buyers, c) Incomes, d) Prices of related goods, e) Preferences, f) Expectations.

Step-by-step solution

Environmentalists Campaign

The case where environmentalists launch a campaign advocating for "One Family, One Car" affects consumer preferences. This is because the campaign influences people's opinions and attitudes towards car ownership, potentially leading to reduced demand as preferences shift.

Baby Boom Impact

The event of a baby boom 16 years ago impacts the number of buyers. As these individuals reach driving age, the potential number of car buyers increases due to this demographic change, leading to increased demand.

Economic Layoffs

The layoffs and increased unemployment affect incomes. When people lose jobs, they have less income to spend, which can decrease the demand for non-essential goods like cars.

Oil Shortage

An oil shortage that raises gas prices impacts the prices of related goods. As gasoline becomes more expensive, the operating cost of owning a car increases. This could reduce the demand for cars, particularly fuel-inefficient models.

Tax Rebates for Commuter Rail

The government's offer of tax rebates for purchasing commuter rail tickets affects consumer preferences. Consumers might shift their preference towards using public transportation due to financial incentives, reducing demand for cars.

Government Bailout and Subsidy

A government bailout and subsidy for the auto industry affects consumer expectations. People may expect that cars will be cheaper or that the industry will become more stable, potentially increasing demand.

Key concepts

Consumer Preferences

Consumer preferences are powerful drivers in determining the demand for goods like cars. When an environmental campaign encourages a shift such as "One Family, One Car," it can significantly change what people want or prioritize. For instance, individuals may start valuing shared resources or environmental conservation over owning multiple vehicles. Such campaigns aim to shape public perception and influence choices, directly impacting demand.

Moreover, government incentives like tax rebates for using public transit can put additional pressure on consumer preferences. By making alternative transportation options more financially attractive, consumers might favor buses or trains over purchasing a new car. This can lead to a decline in car demand as public transportation becomes more appealing.

Incomes

Economic factors such as layoffs play a crucial role in determining a person's purchasing power. When layoffs increase and unemployment rises, individuals face reduced income levels, affecting their ability to buy non-essential items like cars.

In situations where the economy is shedding jobs, people may hold off on large purchases, opting to save their reduced income. The demand for new cars often falls as unemployed individuals prioritize essential expenses and may delay or cancel plans to buy a new vehicle.

• Reduced income means less money for luxury or non-essential goods.
• People may restructure their budget to accommodate only necessary spending.

Prices of Related Goods

The prices of related goods, such as gasoline, can strongly influence the demand for cars. An increase in gas prices due to shortages can make operating a vehicle more costly. When the price of gasoline soars, consumers might look for more fuel-efficient cars or consider reducing their car usage to minimize costs.

This situation particularly affects the demand for gas-guzzling vehicles, as potential buyers might decide against purchasing cars that are expensive to operate. With heightened gasoline prices, the total cost of car ownership increases, potentially leading to decreased demand, especially for less fuel-efficient vehicle models.

Expectations

Consumer expectations also shape demand in significant ways. For instance, if the government announces plans to bail out the auto industry, consumers may anticipate lower car prices or increased stability in the market. These expectations can encourage people to buy cars, as they might foresee a better market or more competitive pricing in the near future.

Expectations about future economic conditions, policies, or subsidies can either boost or dampen current demand. The belief that cars will become more affordable or that manufacturers might introduce more attractive models can spur consumers to buy sooner rather than later.

Number of Buyers

The demographic makeup of a population naturally impacts the number of potential buyers within a market. A scenario like a baby boom 16 years prior affects the current number of car buyers. As this large group of people reaches the age where they can drive, the potential pool of car purchasers expands.

An increase in the number of buyers directly correlates with higher demand for products like cars. More people of driving age mean more potential sales and, consequently, more interest in the features and prices that the car market offers. This demographic shift is crucial for industries to understand as they project future demand and strategize accordingly.

• Larger population subset reaching maturity and consumer age.
• Direct link between the number of individuals becoming eligible buyers and rise in demand.