IBDP Economics Question Analysis Topic: Economics - Demand
Discuss whether demand for cars is likely to increase in the future. (8 marks)
For IBDP Economics, you should know:
Worldwide car sales are expected to grow to over 71 million automobiles in 2021, up from an estimated 63.8 million units in 2020. It can be argued whether this trend will be the same in the future as the demand for cars is influenced by many factors. (Introduction)
(Reasons) There are several reasons demand for cars is likely to increase in the future.
People may experience a rise in income and they may switch from other forms of transport e.g. bus travel to car travel. It should be noted that cars are normal goods which means that they have a high-income elasticity of demand. Consequently, when real incomes are rising there will likely be an expansion of the demand for new cars as they become more affordable.
Due to technological advancements, the cost of producing cars may fall and cause a reduction in the price of cars. Also, the government may remove taxes on energy-efficient vehicles such as electric cars causing a fall in their prices. As cars have relatively elastic demand, a fall in price will result in an automatic rise in the demand for cars. People may also opt to buy used cars which are often sold at a cheaper price than new cars.
The economy may experience economic growth and standards of living may improve. This may lead to urbanisation and a better lifestyle. This will have a positive impact on the demand for cars.
Interest rates may fall, encouraging people to borrow. There may also be greater availability of bank loans and hire purchase facilities. This will increase demand for cars as it will facilitate customers when paying for them. The availability of finance options makes it affordable for car buyers who don't have enough money in hand.
There may be more effective advertisements to persuade people to buy more cars. In the future, the world will be more connected and new advertising methods will be implemented. Advertising is important for car companies as it helps to promote the sales of its product and influence the consumers in favour of that product. When advertisements prove successful they cause an increase in the demand for cars.
Due to higher standards of living, there may be low death rates, high birth rates and high immigration in a country. As population increases, there will be more potential buyers of cars.
(Counter-argument) There are several reasons why the demand for cars may not increase in the future.
Other forms of transport may become cheaper and of better quality in the future. For example, new railways may be built making travel journeys shorter by train. In this case, there will be a fall in the demand for private vehicles. Also, people may be more concerned for the environment and they may prefer to walk or cycle. Governments may increase taxes on car travel to reduce pollution making car travel expensive.
There might be an increase in the price of petrol in the future and people may opt for other forms of transport. Petrol and cars are complementary goods. This means that the higher the price of petrol, the lower will be the demand for automobiles.
The prices of other complements such as car parking charges, road tolls and inner-city charges may rise. The costs of running a vehicle continue to rise well above the average rate of consumer price inflation. Car insurance premiums may also increase at a rapid rate.
There may be a global recession and higher unemployment in the future. This will reduce people's confidence in buying a car. Buying a new car is a major purchase and, with macroeconomic conditions remaining uncertain, there will be a lack of consumer confidence. Consumers may opt to postpone their purchase of a new car until their situation improves.
(Conclusion) To conclude, with a growing population, it is likely that the demand for cars will increase in the future. Consumers will take their carbon footprint in consideration before buying a car. The demand for energy-efficient electric vehicles will further increase. These vehicles are non-polluting and enable consumers to save on petrol. The government may also subsidise the purchase of electric vehicles to encourage car buyers. However, if a country experiences a recession, the demand of cars will most certainly slow down.
End of analysis. Great!