tony-yang458

[tony-yang458]

Used-Car Market

Student name & ID

Tony Yang 13872738

Jingcheng Shi 24417898

Discussion time: Thursday 7pm

Price changes in the used-car market

As a college student, responsible financial management is paramount, particularly for significant expenses such as purchasing a car. Consequently, a basic understanding of economics is an essential tool to make informed decisions and navigate market fluctuations. In pursuit of this objective, my friend and I embarked on an investigation into the used car industry, leveraging the fundamental economic principles imparted in our Econ 20A course. Among these principles, the law of demand stands out as a cornerstone of economics. This fundamental tenet asserts that the quantity of a good or service demanded by consumers decreases as its price increases, ceteris paribus, and conversely, the quantity demanded increases as the price decreases.

Applied to the used car market, the law of demand implies that as used car prices increase, the quantity demanded decreases, and conversely, a decrease in price leads to an increase in quantity demanded, as represented by a downward-sloping demand curve. However, other factors, such as the availability of credit, consumer preferences, and technological advancements, also play a crucial role in shaping demand.

The COVID-19 pandemic has led to significant changes in consumer behavior, which, in turn, has had a profound impact on the used car market. With many people working from home, the demand for cars has declined, resulting in a surplus of used cars on the market. Nevertheless, at the same time, the supply of new cars has dwindled due to factory closures and supply chain disruptions, prompting an increase in demand for used cars as a substitute. 

Based on the image, we analyzed that:

In early 2022, inflation in the United States was attributed to the thriving used-car market, which had become a reliable predictor of inflation trends due to the escalating prices of used cars. However, the trend changed towards the end of the year due to several factors, including increased interest rates by the Federal Reserve, a surge in new car supplies, and fears of an impending recession. As a result, wholesale used-car prices plummeted to their lowest levels in over a year.

According to Jonathan Smoke, the chief economist at Cox Automotive, the drop in wholesale used-car prices was followed by a surge in new car retail sales as new vehicle inventories began to build up. However, Cox Automotive, the largest online and offline (O2O) trading platform for automobiles in the US, has recently reported a significant upturn in used-car auction prices. The Manheim Used Car Value Index, which tracks used car auction prices, surged by 4.3% from January to February 2023, representing the largest monthly increase since October 2021. This is also the most significant surge for the month of February since the 4.4% increase recorded in February 2009, 14 years ago.

Goldman Sachs has identified two significant factors responsible for the rebound in used-car auction prices. The first is a temporary supply restriction of automotive chips, and the second is a reduction in long-term rental market sales. The scarcity of automotive chips has had a domino effect on the automotive industry, resulting in a decrease in the supply of new cars and an increase in demand for used cars, ultimately driving up their prices. Similarly, the reduction in long-term rental market sales has created a shortage of used cars, leading to a surge in demand, which has also driven up prices.

In conclusion, understanding the principles of economics, especially the law of demand, is essential in making informed purchasing decisions in the used car market. By keeping abreast of market changes and considering the various factors that influence demand, college students can make prudent choices, optimize their budget, and acquire reliable vehicles at reasonable prices.