Auto Industry 1

Economic Profile of the Auto Industry

Joseph S. McMahan
University of Phoenix
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The profile that I will be discussing is a breakdown of each areas of issues within the auto

industry. For years the auto industry was one of the top industries in the market, but its ever-slightly

declining state over the years and to the present has made it one of the most struggling industries in the

world. Competitors all over the world try to make the bigger, better car to keep up with each other,

however, this competition has come with a price, leaving employees without jobs, losing millions, and

shutting down auto dealerships as well as manufacturing plants. The auto industry is the industry and

area of commerce in which automobile models are planned, designed, manufactured, and marketed.

The automobile industry is concerned with profits and competition; with consumer demands for

styling, safety, and efficiency; and with labor relations and manufacturing efficiency. The automobile

industry has been around for a couple hundred years, this has always been a constantly fluctuating

market with its scientific developments that may save our environment to its struggle with trying to

stay afloat amongst all of the other industries. In this study I will try to discuss every aspect from

supply and demand all the way down to economic influences on this industry.

PRICE ELASTICITY OF SUPPLY AND DEMAND: The changes that are involved with supply

and demand that include price elasticity have strong significant affects on the auto industry. As close to

the markets, the cost of the raw materials are not fixed in price. However, not all of the tax rates are

fixed. Whenever the cost of these materials or the taxes go up, the auto industry pass the cost onto it's

consumers. This cost is reflected with an increase of the price of the vehicles the company sales.

Whenever the price of the car goes up, the demand for this goes down. The price elasticity of demand

in this industry depends on the location, in places where there is public transportation that is easier to

use and more in demand, the price would be elastic. This is a big deal especially when gas prices are

higher. In places like this cars would be considered a luxury.

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Since there are more and more ways to get around cheaper and publicly like trains, buses, taxis,

the demand for the auto industry will drop as the price increases. In areas where the public

transportation is limited the elasticity will be inelastic because of the public transportation is limited or

not available in some areas of the city. This will consider cars a necessity. Gas will always play a

major role in the determination of the demand for cars. Gas goes up the demand for this industry goes

down, the oppisite happens when the price of gas goes down. When the price of cars goes up due to the

reasons stated, the supply of cars will be affected as well. According to principle of supply, higer prices

raise the amount of the product that is supplied. The elasticity of the supply of cars is ultimately elastic.

Only time will tell when the result in inreased supply to keep up with the high prices. When the supply

of cars go up, the surplus of products in the market due to the decrease of demand will be great.

Ultimately, the equilibrium price will go down. This will cause the demand to increase and a shortage

of the supply of products.

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POSITIVE/NEGATIVE EXTERNALITIES PRODUCED BY THE AUTOMOTIVE

INDUSTRY: There are some positive and negative externalities associated with the auto industry. Two

positives that deal with the auto industry are: lower costs and source of employment. A few negatives

are air pollution, lead pollution, road congestion, and reduction in the earth's natural resources. The

increased production of the auto industry has increased the air pollution problem in the United States.

This pollution is affecting the citizens of the U.S. with health risks dealing with the air pollution. This

negative is also contributing to the problem of global warming, making it hard for people to live in

certain areas of the U.S., this is majorly affects the economy due to a rise in healthcare costs. The

usage of lead in batteries also contributes to the lead pollution by affecting air, water and soil with the

improper disposal of the materials or non-recycling of these batteries which greatly affects the

economy due to a rise in healthcare, reduction in plant products, and harming aquatic habitats.

WAGE INEQUALITIES IN THE AUTOMOTIVE INDUSTRY: Wage inequality can be

measured by analyzing the collective bargaining and labor management relations existing in the

industry. The major factors deciding the level of wage inequality are competition, labor peace,

protection of income and employment etc.. Wage inequality has been an issue with the auto industry

putting workers in akward positions such as giving union workers more pay, more hours and leaving

behind the non-union workers. “Before contract negotiations between the UAW and General Motors

commenced last year, UAW workers earned between $70 and $75 per hour in wages and benefits, Mr.

Cole said. International firms paid their non-union workers about $45 per hour in wages and benefits.

The hourly cost differential was between $25 and $30.” (Dickson, 2008, para. 5). This contract

included the lower paid workers a totally different health and benefit plan than those that make the

higher wages and are specifically union workers.

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This inequality not only has been a struggle, but called more of a war against the inequality which

some think that UAW might be losing.

FISCAL/MONETARY POLICIES AFFECTING THE INDUSTRY: The change of the

manufacturing structures is greatly different since the 1950's. Today, the U.S. manufacturing companies

are more like service companies. In the 50's there were about six industry workers to every one non-

industry workers, but today this number has gone down significantly from about six to one to two and a

half to one. Fiscal policies by the states are to be followed carefully to balance the economy in the

context of these global economic conditions. According to Federal Reserve Bank of Chicago (2009), “

While deciding upon exports and imports and various related tariff structure the several global

economic treaties and decisions of regional economic forums are to be taken in to account. Resources

advantages of the immediate competitors also will have to be a decisive factor.”

Price stability and real economic stability can be provided to the industry by the central bank,

supported by an appropriated monetary policy. To set a foreign exchange rate an equilibrium level, an

interest rate sufficient to create price stability has to be adopted. In the case of recession a relaxed

monetary policy and in the case of upswing a restricted monetary policy is advisable. Loss of

independent monetary policy will lead to high inflation volatility. This is a situation faced by many of

the European states after shifting to the euro economy. The rate of inflation and the volume of money

supply can be regulated to a considerable extent by following a correct monetary policy. Therefore such

a monetary policy can be influential in deciding the future of automotive industry

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ECONOMIC INFLUENCES ON THE INDUSTRY:According to Routledge (2008), "Exchange

of skills and knowledge which are complimentary are made possible in a mutual learning arrangement

between two industries in partnership. If the industries are different countries, for example from France

and from Japan, cultural and economical back grounds can be exchanged constructively. We can

illustrate this point by citing the collaboration of the French car maker Renault with the Japanese

Nissan as an example. In this case it is said that the corporate know how of the French company has

positively affected the Nissan’s turn around. This case is an example of positive effect of a globalized

and technology advanced economy. ” (Foreign Influences on the Japanese Automobile Industry: The

Nissan-Renault Mutual Learning Alliance) There are cases of economic conditions adversely affecting

the industrial sector as a whole and the automotive industry in particular. War and Terrorism are two

such important factors. We can clarify this point with the help of historical example of the great

depression occurred after the First World War. These types of adverse effects are happening to the

automotive industry due to the constraints of economy, due to the enforced fiscal and monetary

policies, in the context of the war.

The entire economy is a very influential part of this industry, there are a few aspects that can be

seen as being involved, both national and international. National economical conditions are used to

decide the greater extent of the fiscal or monetary policy followed by each state. International

economical conditions are used to decide global trends of competitve and technological advancements.

Among the several of such economic factors, there will be both positive and negative factors for a

particular industry, in this case the automotive industry. It is up to the industry to study the factors

systematically and plan accordingly so that the maximum positive economic influences suitable for the

automotive industry are explored and utilized.

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Sources

Dickson, D. (2008, November 24). U.S. auto industry closing great divide in quality, wages.
Washington Times. Retrieved from http://www.washingtontimes.com/news/2008/nov/24/us-auto-
industry-closing-great-divide-in-quality-w/

Federal Reserve Bank of Chicago. (2009). Federal Reserve Bank of Chicago. Retrieved from
http://www.chicagofed.org/news_and_conferences/conferences_and_events/research_conferences_past.
cfm

Routledge. (2008). Informaworld. Retrieved from http://www. informaworld.

com/smpp/content~ content=a788483412~db=all~jumptype=rss