Household Demand for Cars
The decision to buy a cable car is beneficial silent as an example of unit demand. Most households—even if they own more than one car—do not buy a large numeral of cars at a clock time. rather, they buy a single car. The decision about whether or not to purchase a car thus involves comparing the valuation a family places on the car with the price of the cable car. One way to illustrate this is to look at the family ’ randomness budget line when it does or does not purchase a car .
Toolkit : section 17.1 “ individual demand ”
Reading: The Demand for Automobiles
You can review unit need, valuation, and budget lines in the toolkit .
The family ’ s choice is shown in Figure 16.1 “ The Household ’ s Budget Line When It Does or Does not Buy a car ”. ( This draw on our presentation of unit necessitate in Chapter 3 “ everyday Decisions ”. ) The family can spend income on three items : chocolate bars, downloads, and a new cable car. If the family chooses not to buy a car, then it consumes the combination of downloads and chocolate bars indicated by point A in the graph. This is the family ’ s most prefer indicate in the budget cable, given that it does not buy a car. If the family buys a car, then the combination of downloads and chocolate bars it consumes is given by indicate B. The budget agate line is shifted inward by the total of income the family spends on the car—that is, by an total equal to the cost of the car. The family ’ s decision about whether to purchase the car involves comparing bundle A to ( bundle B plus a car ) .
trope 16.1 The Household ’ s Budget Line When It Does or Does not Buy a cable car
here we illustrate a family ’ sulfur choice about whether or not to purchase a cable car .
Remembering the theme of buyer surplus, this is the same as saying that the family would buy the car if the purchase gave it some excess. In other words, the family ’ s decisiveness rule is
purchase car if valuation of car − price of car = buyer surplus > 0.
If the price of the car is greater than the family ’ s valuation, the family prefers point A to point B and does not buy the car. If the price of the car is less than the family ’ second evaluation, it prefers point B to point A and buys the car.
Toolkit : section 17.10 “ Buyer Surplus and Seller Surplus ”
Buyer excess was introduced in chapter 5 “ eBay and craigslist ”. You can besides review the versatile kinds of excess in the toolkit .
There is another way of looking at the lapp decision that gives us a way to measure the family ’ s valuation of the car. Remember that the family ’ s evaluation of the car is the maximum come that it would be willing to pay for it. Look again at Figure 16.1 “ The Household ’ s Budget Line When It Does or Does not Buy a car ” and begin at point A. now move the budget line in until we find that the family is good as happy at period A or bespeak B. We have nowadays found the point where the family is apathetic between the combination of cocoa bars and downloads it buys without a car and the pile it buys along with the cable car. The come by which we have moved the budget channel is the family ’ s valuation of the car .
If there were lone a individual model of cable car for the family to choose from, we could stop here. The family would compare the valuation of the car against the price and buy the car american samoa long as the evaluation is greater than the price. today, however, cars differ in numerous ways. Like many goods, a car consists of many different features all bundled together. These include the car ’ south performance features, styling, color, and good system ; whether it has leather seats, a sunroof, and air condition ; and hundreds of other attributes that we could list. The family ’ s valuation of a car embodies a evaluation of each attribute of a car .
This complexity makes the decisiveness to buy a car a challenge. How can this decision be made ? For every car available on the market, the family can calculate the buyer excess attainable from that car. After considering all these alternatives, the family should then buy the car that gives the most excess. Of course, households do not literally sit down with a list of cars and try to calculate the accurate excess from each one. But this is a utilitarian, if stylized, representation of how such choices are made. In effect, the family is making a unit requirement decision—buy or not buy—about every single cable car. For about all cars, the family chooses to purchase zero .
( There is a nuance you may be wondering about here. Hundreds of different cars might yield positive excess, but obviously the family does not buy hundreds of cars. The trick is that, once the family has bought the car that gives the highest excess, the evaluation of all other cars it might consider buying decreases well. If you don ’ deoxythymidine monophosphate own a car, then a Ford Focus might be very valuable to you. If you already own a Mazda 5, then the value of a Ford Focus would be much smaller. )
Deciding what cable car to buy is only one separate of the family ’ second decision. As we already noted, the family must decide when it wants to buy a car. A car is a durable dear Goods that last over many uses. ; it lasts for several years. If a family already has a car, it can decide to defer purchase of a fresh car until by and by. A family is probably to do this if ( 1 ) there is significant doubt about future income ( possibly members of the family fear losing their jobs ) or ( 2 ) cars are probable to be relatively cheap in the future. To understand this choice, we turn to some of the tools introduced in chapter 4 “ life sentence Decisions ”, and Chapter 9 “ Making and Losing Money on Wall Street ”.
A car is an asset : it yields a menstruate of services. As a consequence, buying a car is both an act of consumption and an act of saving. This means that the decision to buy a car is an example of decisiveness make over time. The family looks at both current and expect future income when deciding about the purchase, and it knows that the cable car will yield benefits for many years. furthermore, because a cable car is an asset, its evaluation today depends on its prize in the future. You might buy a car this year and then discover your transportation needs have changed. In that event, you can sell your car in the use car market. The more you expect to get for your car whenever you might sell it, the more you are will to pay for it today .
The demand for a detail car besides depends on factors other than the price of the cable car itself. The prices of other goods—most importantly, other cars and other forms of transportation—also matter. Household income, both now and in future years, is another antigenic determinant of demand. last, because you often purchase a car with a car loan, the interest rates charged on loans may matter for your car purchase. A decrease in the interest rate for car loans will increase the demand for cars .
In summarize, buying a car is a very complex decision. There are rich substitution possibilities involving the choice of different models, the timing of the leverage, and the possibility of using public department of transportation rather than owning a car at all. The law of demand applies to cars, fair as it does to other goods and services. But as we move along the need bend in reception to a change in the price of cars, the substitution possibilities are complex. Understanding these substitution possibilities is critical when firms are choosing the prices to set for the cars that they produce .