Demand and Supply on the Auto Market

In its rationale for the introduction of a new small car (the Fiesta), Ford describes a growing
quantity demanded of small cars, and a decreasing quantity of larger vehicles. In order to best understand
this change, it is helpful to segregate the auto market into two sub-markets: the market for small cars and
the market for large vehicles. While several factors are attributed to the increasing number of small cars
being purchased by today’s consumers, the most important of them is the increasing price of fuel (and the
uncertainty surrounding fuel prices). Although fuel is a complementary good for all types of motor
vehicles, it has a stronger complementary relationship with larger vehicles, which tend to have relatively
worse fuel efficiency. Thus, an increase in the price of fuel will cause a subsequent decrease in the
demand for large vehicles (represented as a leftward shift in the demand curve below), while causing the
demand for small vehicles to increase (a rightward shift of the demand curve).
Ford also sites a trend towards “urbanization” and an increased sense of environmental
resonsiblity as a factors in the increased demand for small cars. These may be characterized as changes in
consumer preferences away from large vehicles and towards smaller cars. The shifts representing these
changes are qualitatively identical to those outlined above: a decrease in demand (left shift) for large
vehicles and an increase in demand (right shift) for small cars.
Ultimately, all of these shifts will results in a increase in the price and quantity demanded of
small vehicles (the outcome Ford is anticipating with its new small car focus); the price and quantity
demanded of larger vehicles should subsequently decrease.

Warren Ashley