Low supply, high demand drive up value of used cars

The used-car market has been going strong since the recession began, but high gasoline prices, shrinking inventories and seasonal factors are pushing the prices of some models through the roof this year.

Kbb.com, the Kelley Blue Book site, reports that values for fuel-efficient cars are up almost 20 percent since January.

The trade-in value of a 2008 Toyota Prius has increased $3,800 since Jan. 1, while the value of the Ford Escape hybrid is up about $1,950.

Sam Godreau, used-car manager at Toyota of Berkeley, says some later-model used Priuses are selling at auction for more than their original sticker price.

Midsize cars, such as the Ford Fusion, are also doing well as people trade down from sport utility vehicles, says Paul Seredynski, senior editor of Edmunds Auto Observer.

The article explains that due to the economic recession, the demand for used cars has increased, due to high petrol price and shrinking inventories (people kept their cars longer. These factors have increased the demand for fuel-efficient cars by 20% since January. The average price for a 3-year-old used car is up 4.5%. The strongest category is premium compact, which is up 20%. Ever since the recession there has been a rapid decrease in new car production. From 1998 through 2007, new-car sales and leases ranged between 16 million and 17.8 million vehicles per year. That number dropped to around 13.5 million in 2008 and 10.6 million in 2009. It recovered slightly, to around 11.6 million in 2010. This supply and demand graph below will illustrate the change in demand for “used cars”. This due to the decrease in incomes of consumers, which then allows them to substitute new cars for used cars. The preference of used cars over new cars, is an example of opportunity cost.

Vocabulary-

·         Supply- The amount of a good or service offered for sale.

·         Supply Curve-relates the supply of a good to its price, holding the prices of inputs constant.

·         Demand- The quantity of a good or service that people want to buy.

·         Demand Curve- relates the demand for a good to its own price, holding all other factors constant.

·         Determinants of demand- non-price factors that influence the demand for a productEquilibrium price- quantity supplied and quantity demanded are equal for competitive producers is their marginal cost.

·         Opportunity cost: The next best alternative forgone when an economic decision is made.