The Automotive Industry

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Auto industry is a major player in the United States economy. Apart from the convenience created by the vehicles, a lot of employment opportunities retail businesses are generated by this industry. As captured in the Economic and Business Group Center for Automotive Research (2003), this industry has continued to generate increased output than other industries in the United States approximately valued at 51% during 1987 and 2002. In terms of the value added for each employee, the automotive industry is among the highly ranked industries in the manufacturing sector. It has also significantly contributed to tax revenues to the U.S. Moreover, the success of material manufacturing companies such as metals heavily relies on this industry. This industry is very crucial to the economy of the United States since Americans heavily depend on it in such areas like going to work, transportation of commodities, facilitation of business ownership and employment (Economic and Business Group Center for Automotive Research, 2003).

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How does the Shifts and Price Elasticity of Supply and Demand Affects the Automotive Industry?

The shifts in price elasticity of supply and demand significantly affect the automotive industry. As other markets, raw material costs and tax rates are not constantly fixed. When raw material costs and tax rates increase, this increase in cost is passed over to the consumer by the automotive industry. This consequently results into an increase in price of vehicles. Depending on the geographic location, the price elasticity of demand can either be elastic or inelastic. In areas where transport alternatives rail and road are reliable and cheap to use, such as in New York, elasticity of demand tends to be elastic. This is particularly true when the prices of gas are high. For instance, vehicles are considered a luxury. Because of the existence of cheaper alternatives, demand for automotive decreases and its prices increases. In such areas as Central Florida where there are limited public transportation, price elasticity tends to be inelastic since public transportation is limited and at times not available at all in some parts of the city. As a result automobiles become a necessity. Demand for automobiles is also determined by fuel prices. An increase in the cost of fuel causes the demand for automobiles to reduce and vice versa is true when the cost of fuel decrease (U. S. Department of Transportation, 2002).

As stated above, when the price of automotives increase, the supply of automobiles is affected too. According to law of supply, as prices become high the quantity of product supply increases (Mankiw, 2004). The price elasticity of supply becomes elastic with time for the automotive industry. This is because additional time will lead to an increase in supply in response to the high prices. With the increase in supply of automotives, a surplus of products results in the market as a result of the decrease in demand. This in turn decreases the equilibrium price resulting in an increase in demand and consequently a shortage in the product supply (Economic and Business Group Center for Automotive Research, 2003).

Positive and Negative Externalities on the Automotive Industry

Automotive industry is associated with a number of positive and negative externalities. The two major positive externalities associated with the industry are lower costs and employment opportunities. A worker in the automotive industry confirms that the most positive externality evident across the economy is lower costs since the distribution of goods and movement of consumers is made cheaper by motor transportation. This industry also generates employment opportunities for the unemployed, in so doing reducing the rate of unemployment (Leary, n.d).  Employment figures in the United States as a result of automotive employment increased by 8% between 1991 and 2005, which translates to a rise from 1,054,000 workers to 1,098,000 workers (U.S. Department of Commerce, n.d).

Apart from the positive externalities, automotive industry in the United States is also associated with some negative externalities which include air pollution, lead pollution, depletion of natural resources such as oil, and road congestion. Air pollution has increased as a result of the increase in production of the auto industry in the United States. The research states that United States produces the largest emission of greenhouse gases with 16% increase from late 1990’s. This greatly affects citizen’s health because of the risks accompanied with the pollution. Air pollution as a negative externality has greatly contributed to the current problem of global warming, which has made certain areas of the U.S. become difficult to reside in as a result of increase in temperatures. This negatively affects the economy because of the increase in healthcare costs (Environmed Research Inc., 1995).

Vehicles heavily rely on lead components such as the starter battery, a major source of lead pollution. The usage of lead by the automotive industry negatively affects environment resources such as air, water and soil. Inappropriate recycling of waste materials contributes to pollution and its associated health problems on human. As a result, the economy is affected greatly by this pollution because of increasing cost of healthcare, drop in plant production, and death to aquatic populace (Environmental Defense, 2003).

Another negative externality associated with the automotive industry is reduction in quantity of non-renewable earth products such as crude oil. Gasoline and diesel consumption in the U.S. significantly increased from 1992 to 2000. Yet another problem associated with the auto industry is road congestion. Traffic congestion on roads increase proportionally with the increase in production and purchase of automobiles. This contributes to increased road accidents. Despite the governments effort to control road congestion by implementing tolls and HOV lanes, road congestion in other parts of the United States has not yet been controlled (U.S Department of Transportation, 2002).

Wage Inequality Impact on the Automotive Industry

The automotive industry is a major contributor to employment in the United States. It has also contributed to increase in the country’s tax revenues. However, many automobile industry players are feeling the financial pressure as a result of expenses and the government’s policy on minimum wage policy. They are also feeling the heat from competition from foreign companies which have cheap labor force. This negatively affects the performance of U.S. auto manufacturers. American auto makers are operating in a difficult environment crowded by foreign companies who offer strong products and relatively low prices. More of these foreign companies continue to enter the market day by day. Apart from concerns of drooping sales, automakers profits have been hampered by the struggle with the strong unions. A number of automakers such as GM have experienced loses which has necessitated a significant job cuts in order to restore their dwindling market share and return to profitability. Major auto marker parts suppliers such as Delphi argue that contracts involving labor running through September 2007 should be declared void and workers pay reduced (Jones, 2006).

Monetary and Fiscal Policies that have affected the Automotive Industry

Monetary policies have had great effects on the rates of employment, growth rates and auto industry prices. Employment is affected because as the money supply increases, its value and subsequently interest rates decrease. This has increased the demand for automobiles and in effect increasing rates of employment. As the supply for money decreases, the employment rates decrease. The growth of automotive industries has been greatly affected by monetary policies because high interest rates have led to reduction in consumer’s ability to spend. This has narrowed the auto industry growth. On the other hand, a decrease in interest rate increases consumer’s ability to spend and consequently the expanding growth of business. Monetary policies participate greatly in price determination of auto industry products. In this case, when there is an increase in the supply of money, interest rates are reduced. As a consequence, the demand for automobile products increases. The demand for automobiles is then equalized by regulating the equilibrium price of the product (U.S. Department of Commerce, n.d).

Fiscal policy also affects rates of employment, rate of growth and price of auto industry products. Employment rates are affected because higher taxes squeeze the spending limit of auto industry players and consequently decreasing employment rates. When the government’s fiscal policy results into low taxes, the industry’s ability to spend is expanded and thereby increasing employment rates. The growth of auto industry is also constricted by the tax increases and the reduction in government spending. On the other hand tax reductions and government spending increases results to an expansion in growth of this industry. The ability of consumers to purchase is increased by low taxes which in turn influence the purchase price for the product (U.S. Department of Commerce, n.d).


 As observed in the information provided above, the success of the automotive industry depends greatly on the economy. Several following factors play a major role in the success of automotive industry. These factors include consumer choices, government intervention, cost of raw materials and competition form overseas markets among others. Consumer choices affect this industry because the profits and success of the industry depends on the purchasing power of consumers. This is evidently mirrored on the first principles of economics where people face tradeoffs (Mankiw, 2004). Higher prices forces consumers to look for other alternatives such as public transportation. A great role in determining the success of the automotive industry is played by government interventions. Government intervention may be in the form of tax administration or setting up a minimum wage standard requirement. Increase in taxes results into reduction in profit to the manufacturer. This increase also results into low sales because tax increases are reflected on the cost price of automobiles which increasing the purchasing price of auto industry products. When the government spends a lot, it risks running into inflation. This inflation reduces the value of money and consequently results into high selling prices. Another factor that affects the success of the automotive industry is the cost of raw materials. An increase in the cost of raw materials increases the price of the final product. This significantly increases the selling price thereby reducing sales and resulting into reduction of profits by the automotive companies. A drop in the costs of raw materials has the opposite effect and therefore results into high profit margins for these companies (Whiston, n.d).

The final factor affecting the performance of the automotive industry is competition from overseas companies. These foreign companies benefit from low labor costs in their countries and therefore exert a lot of pressure on U.S. auto makers. This forces automobile manufacturers to relocate some departments of production to these countries with cheap labor. This has resulted into high unemployment rates in the United States (Economic and Business Group Center for Automotive Research, 2003).

Although some economic influences affect the automotive industry in a positive way, some of them negatively impact on the industry. Some of these negative factors are competition from foreign countries, increase in taxes, increase in the cost of raw materials and high cost of labor. As stated in the above paragraph, low labor cost in foreign countries has greatly increased competition with the United States automobile manufacturers. This has affected the sales and consequently profits of this industry. High taxes also results into a reduction in profit to the manufacturer. The sales are reduced because the tax increments are passed on to consumers by increasing the selling price of the automobile products. The selling price of the final automobile product increases with the increase in the cost of raw materials. This also results into constricted sales and hence a drop in company’s sales. High labor costs increases expenses incurred by these companies and thereby resulting into a drop in profits by the auto industry companies. With all these factors, many automobile manufacturers have not been able to overcome the challenges posed and have therefore resorted to cutting down on unnecessary expenditure in order to avoid bankruptcy (Economic and Business Group Center for Automotive Research, 2003).

With the recent change in government, it is encouraging to note that a lot of efforts are being put in place to ensure that the industry does not fall to its knees. This is in particular evident through the bailout packages accorded to the industry by the federal government. This package has helped automotive companies such as GM and Chrysler to continue operating. However, the concern has been the drop in sales. In as much as these companies are being restructured, efforts to empower consumers to enable them afford these products should be encouraged to return these companies to profitability. It is encouraging that a stimulus package intended to allow consumers to purchase vehicles is soon becoming law. This will ensure that a certain percentage of tax from sales and loan interests are deducted to low the selling price of these vehicles (Thomson Reuters, 2009).


Economics and Business Group Center for Automotive Research (2003). Economic contribution of the automotive industry to the U.S. economy-an update. Retrieved February 23, 2009 from

Environmed Research Inc. (1995). Cars, air pollution and health. Retrieved
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Environmental Defense (2003). Automobile industry largest source of lead pollution today. Retrieved February 23, 2009 from

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Leary, T. B. (n. d.). Allies in a common cause. Retrieved February 23, 2009 from

Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chicago, IL: Thomson South-Western

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