Economic Profile of the Automotive Industry

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Table of Contents

Introduction
The Industry
Shifts and Price Elasticity of Supply and Demand
Positive and Negative Externalities of the Automotive Industry
Wage Inequality in the Automotive Industry

Introduction

Since the invention of the first self-propelled road vehicle by a French engineer, Nicolas Cugnot in the late 1700s, the automotive industry has grown to be one of the leading industries in the world. The auto industry has been improving over the years with features that influence people’s life, the market, and the economic well-being of a Nation. Today, the automotive industry makes a large segment of the general United States economy, and because of its dominance in this industry, this research will center mainly on the United States automotive industry.

In the US, the automotive industry has the capacity to produce over $250 billion dollars in wages compensation for over 6.6 million direct and indirect jobs. Changing economic conditions, business and political policies and consumer preferences are some of the factors that have caused a revolution in the automotive industry. It is important to note at this early stage that the Automobile industry is correlated with the fuel industry as the usage affects gasoline expenses.

The Industry

The automotive industry represents over 16% of the United States manufacturing gross domestic products (GDP) and over 3% of total industrial GDP as of 2007. There are over 26,000 new car Dealers generating over $560 billion in sales and over 25,000 used car dealers generating over $36 billion in sales. In terms of automotive spin-off establishments, there are over 140, 000 auto part dealers across the United States generating over $900 billion as of 2007.

Although most of the automobiles are sold through a usual dealership, the internet has played a big role in revolutionizing the automobile market and how business in this sector is done. In the past 12 years, the internet has increased the automobile market by a significant percentage. Over 50% of people purchasing automobiles make use of the internet as part of the buying process. Dealers of new vehicles are increasingly using the internet to advertise and sell their products. As of 2007, over 120,000 units of new and used cars were sold over the internet.

Shifts and Price Elasticity of Supply and Demand

The automotive industry follows a three-dimensional pattern as the industry demand and supply vary proportionally with the operating price and the price of the product. The United States market is competitive for both small and middle-size automobiles due to the operation cost, making the price elasticity to be inelastic. This is because the primary demand influence of the automotive industry is not the product itself, in this case, the vehicle, but the cost of operating, in this case, the price of gasoline.

Another factor that makes the automotive price elasticity to be inelastic is because the supply does not necessarily affect auto demands; this means that Increased need for transport does not necessarily create demands for automobiles because there are other alternatives that people can use to meet their needs. People need transport to attend jobs and schools and make social life easier, and this is the only reason why auto transport is the most common feature of transportation.

However, there is a feature in the product, that’s is vehicles, that makes the price elasticity to be elastic, this includes a music system and other add-on features that make a car to be more updated. Most automobile buyers are influenced by the sound systems especially when buying souped-up cars. Cars with better features and high performance are likely to have high demand making the price elasticity of demand become elastic. The elasticity of supply, in this case, is that the lower price of the music system; tends to lower the price of the car.

Positive and Negative Externalities of the Automotive Industry

Positive

The automotive industries affect the economy and the life of people directly, bringing with it both positive and negative externalities. The industry improves the lives of people as people are able to save both time and finance over a long period of time by using automobiles.

The automotive industry influences the economy of a country as the industry signifies that a country has valuable economic assets. Any positive increase in automobile productions positively influences country economic indicators thus strengthening the economy.

Negative

Pollution is one of the externalities brought about by the automotive industries as gasoline-powered vehicles produce volatile organic compounds like carbon dioxide, nitrogen oxides, and hydrocarbons. These compounds have been known to contribute to health problems like breathing difficulty and other cardiovascular complications. When some of these compounds react with the atmosphere, they produce ozone gases which destroy the important ozone layer which protect people from being exposed to the harmful ultraviolet rays from the sun.

Automotive industries lead to over-dependence on oil, in the United States today, over 60% of domestic oils are imported from the Middle East, Africa, and South America. This dependency on oil imports makes the economy to be vulnerable due to a shock in energy prices.

Traffic congestion is another issue of concern brought about by the automotive industry. As more vehicles are being put on the road, so is the increased congestion leading to increased loss of time on traffic jams. Congestion results in the loss of billions of gallons of gasoline on an annual basis. Other negative externalities in the automotive industries include; traffic accidents, noise, and cost of maintenance of the infrastructure

Most of the negative externalities brought about by the automotive industries are difficult to manage and control primarily because the automotive industries produce products for private use. As such, it is hard to stop people from purchasing and using vehicles. Nevertheless, players in the industries are taking advantage of the great opportunities presented by the controls aimed at providing solutions to these externalities. This includes alternative transportation means, and the need for energy-efficient automobiles, with low levels of emissions.

Wage Inequality in the Automotive Industry

United States automotive industry is characterized by labor demand instability and commission wages. This leads to reduced wages and a lack of health-care for employees. Today, the situation is different from the early 1980s when the United Auto Workers Union influenced the growth of wages.

Competition is one factor that has a direct impact on wages inequality. The automobile industry has recently experienced increased competition resulting in the need to lower operation costs and maintain or raise the profits margin. This usually affects the workers directly as their wage is reduced. The need for better technological skills to cater to the growing demand of customer preferences results in the creation of an upper class of workers who enjoys better salaries at the expense of lower-level workers.

Automotive industry unions are part of the group contributing to the US economy, which is influencing federal intervention for the passing of regulations and policies that raises the minimum wages; this is seen as the most viable solution to cater for wages inequalities in the automotive industry.

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