Economics of the Automotive Industry

The Economy and the Automotive Industry

Melissa Dykes

Axia College of University of Phoenix

ECO/205

Shaun Brown

January 18, 2009

The Economy and the Automotive Industry

The United States automotive industry has been at the forefront of much of the headlines in recent days. The current economic crisis that this country is in is affecting nearly every person and every industry, and it seems that the auto industry is one of the industries most affected by the state of the economy. The automobile industry is often viewed as the backbone of this country's economy, and many still feel that way. After all, people rely daily on cars and trucks to transport them and help them live their everyday lives. However, the automobile industry has often struggled financially, requiring help from the government at various times. Now the three big auto makers in the United States, Ford, General Motors (GM), and Chrysler, are facing economic conditions so dire that without help, they may be forced to close. This paper will seek to discuss the economic factors of price elasticity of supply and demand, positive or negative externalities of the industry, measurement of wage inequality, and fiscal policies and how these factors have impacted the automotive industry.

Price Elasticity of Supply and Demand

Each and every day, people make decisions on what goods and services to purchase based on need and the costs of the goods or services. As an example, say that a family is going to have a picnic and wants to cook hamburgers. However, when they to purchase the hamburger meat, they see that the price has increased considerably. They are on a budget, so they decide instead to purchase hot dogs. This item has a high elasticity of supply and demand. One is easily interchangeable for the other. A higher price on hamburger meat will create a greater demand on hot dogs. On the other hand, if a person needs a part to make an automobile repair, there is no substitution for the part that is...