Supply and demand determining price is a very important doctrine of modern economics. Something that is taught in the first day of econ 101.
Yet this year has given us a counter example. Car sales have fallen by as much as 7% compared to last year. Supply is up and demand is down. Even so, cars are only going up in price rather than becoming cheaper.
Why is this?
Posted by Kronzypantz
17 Comments
The cost of manufacturing and transporting cars has gone up with the increase in oil prices and the blockade of the Strait of Hormuz.
Just because it costs more to fill them up doesn’t mean they’ll get cheaper.
Inflation going down just means the prices go up less fast, it doesn’t mean they’re going to go down again.
Profit margins across the industry have crashed like 80%. There is no margin to cut. Companies are just trying to stay afloat after the EV mandate flipflop, models are being extended because there is zero remaining budget for R&D for new products. Honda just said no refreshes for their core lineup until 2030 and they are already very old.
You are already getting subsidized prices from a year ago because thus far, the manufactures have elected to eat a majority of the tariff related supply shocks.
You state that car sales have fallen by 7%. How do you know that is a demand side shock and not supply side? If that is just less foreign autos being imported due to tariffs restricting supply that would point to the price increasing to get demand into line with the new lower supply.
The whole economy is about to crash. Then you can buy your car.
New cars are not a frictionless market. There are dealers and salesmen who exist on commission to drive prices to the limit. In our K shaped economy most of the people who can afford a new car can afford an expensive new car.
One part of it is that car manufacturers have almost stopped making normal cars, and try to push luxury SUVs on everyone. It’s especially bad in the US and Canada, but that trend has started to get a foothold in Europe as well (especially here in Norway where streets aren’t as narrow as further south).
But in general, I think the car market in Europe is significantly better than across the pond! Don’t know what the status is for other regions
“Supply” does not mean “how much of a thing is sitting around.” Supply is “how much producers are willing and able to sell at each price.” Cars aren’t cheaper to produce. “Increased supply” means “willing and able to sell more at the same price.” Causes of increased supply include falling costs of production, more competitors, easing regulations, or higher profit for some other reason (maybe post-sale prices or lower marketing costs).
We are not seeing increased supply in that sense. Regulation is worse (tariff confusion), costs to produce are up (Hormuz, tariffs again), and there’s no significant movement in competition.
Profit margins for original equipment manufacturing have fallen. That’s the opposite of what would cause car prices to fall.
Demand has fallen, but so has supply (in the sense of willingness to sell a quantity at a given price). If they fall together, prices could go up, down, or stay the same (depending on the shape of each curve).
Car prices ARE falling — just not here. BYD has slashed its average prices by 32% since 2023. In markets open to Chinese EVs, consumers are genuinely benefiting from competition. In the US, we slapped 100%+ tariffs on Chinese EVs and called it protecting American workers. What it actually protects is Detroit’s pricing power and the fossil fuel status quo. New car average transaction prices just hit $49,275 — up 3.5% year-over-year and $8,000 above pre-COVID levels. Our trade policy isn’t an industrial strategy, it’s a subsidy to incumbents dressed up in a flag.
Weak dollar and inflation. A sandwich is almost 20 dollars. A bottle of soda 3 dollars?
You have to compare it to the everyday things to get a true reading on inflation. We are being lied to about inflation and the dollar.
Substantial tariffs (around 25 %) have been imposed on basically all cars. If not the car itself, many car parts and/or the metal.
Demand is falling? https://www.autoblog.com/news/u-s-auto-debt-reaches-1-68-trillion-overtaking-credit-cards
People are living like there’s no tomorrow and splurging on the fancy new car they always wanted
Tarrifs. – specifically on metals. And controls on China made cars.
If China brands were allowed in the US, prices would tank
The Supply and Demand model you learn in Econ 101 is a simplified, abstract, conceptual version of how price fluctuations happen in the real world. If you’re willing to look for them, there are many examples of situations where supply or demand can shift significantly in one direction or the other and prices remain largely the same, especially with non-perishable products that don’t need to be stored at a specific temperature. If you’re buying and re-selling cars at a big enough scale, you can let a car sit in a garage for a year or two with minimal disruption to your overall cash flow. Businesses have no incentive to lower prices unless they absolutely need to, and right now the auto industry at large doesn’t need to lower prices
This is a stagnant economy. Calling it k shaped is cute but is camouflage. It can be seen everywhere look at the number of cars being driven in need of cosmetic repair. Look at what people are buying in the grocery. This is the Trump economy, and it’s not going to get better. Oil futures are all over 100 a barrel for Brent through Q1 2027. Tight labor stubbornly high essential costs, food and fuel. At the same time data center expansion is driving increased water and electric bill increases. The Billionaires are partying while 90% are surviving. At 4.50-5 a gallon the fully loaded cost of the average new car is $1300 a month. Using the 2024 median household income of $83,730 , and estimating ~19% effective tax rate, net take-home is roughly $5,650/month. So the average new cars total cost per month for fuel insurance and purchase is 23% of the average income. So here is the problem margins are too thin for discounting. Auto mfg were counting on EV for higher margins. Consumers can not afford new cars. Ride share options cut into the market. Stagnation: prices can’t come down consumers have no options. This is an economy where there are close to 2 million people working full time and yet are homeless. My 15 year old Honda that I bought used with cash in 2016 is also part of the problem I still average 27 MPG so as far as I care they can landfill these giant over teched vehicles. Watch for big auto to beg for another tax payer bail out.
The other day I’ve read that major performers are starting to cancel concerts and stating “personal reasons” when in reality it’s the costs. Tickets have become so expensive that concert goers are priced out and seats don’t sell. But to the performer, costs are insane now. From fuel cost, to set cost, to how much they have to pay performers. It’s crazy to think about, even the most income driven event like this isn’t sustainable. I think we are at a point where a lot of stuff is becoming too expensive, even if you remove the fuel price increase. Imagine even starting a small business, the amount of regulations you’d have to go through and how expensive hiring any help is…
A criminal is running the country and everything is rigged? Probably the only answer.