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Demand for Cars and Trade Protection in Pakistan

In Pakistan there is a limited choice of cars to buy. The country has a population of approximately 190 million but only about 120 000 cars a year are produced there. The firms producing cars in Pakistan are protected from foreign competition by a range of methods of trade protection.

Discuss whether demand for cars is likely to increase in the future.

Category:

Demand and Supply

[CIE O level October 2017]

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Answer


Step ➊ : Introduce.

The demand for cars is influenced by many factors. There are several points to consider before determining whether the demand for cars will rise in the future.


Step ➋ : Discuss why the demand for cars is likely to rise in the future.


There are several reasons demand for cars is likely to increase in the future.

➤ 2.1 There may be a rise in income.

People may experience a rise in income and they may switch from other forms of transport e.g. bus travel to car travel. Rising incomes will also mean they will be able to afford the purchase of a car. It should be noted that cars are normal goods which means that they have a high-income elasticity of demand. Consequently, when real incomes are rising there will likely be an expansion of the demand for new cars as they become more affordable. For example, top-end cars are increasing significantly in demand in Bangladesh due to a growing economy and increase of wealth in the country.

➤ 2.2 The price of cars may fall.

Due to technological advancements, the cost of producing cars may fall and cause a reduction in the price of cars. Also, the government may remove taxes on energy-efficient vehicles such as electric cars causing a fall in their prices. As cars have relatively elastic demand, a fall in price will result in an automatic rise in the demand for cars.

➤ 2.3 There may be economic growth in the country.

The economy may experience economic growth and better standards of living. This may lead to urbanisation and a better lifestyle. This will have a positive impact on automobiles' demand.

➤ 2.4 Greater availability of bank loans and hire purchase facilities.

Interest rates may fall encouraging people to borrow. There may also be greater availability of bank loans and hire purchase facilities. This will increase demand for cars as it will facilitate customers when paying for the good. The availability of finance options makes it affordable for consumers who don’t have enough money in hand.

➤ 2.5 There may be more advertisements.

There may be more effective advertisements to persuade people to buy more cars. In the future, the world will be more connected and new advertising methods will be implemented. Advertising is important for car companies as it helps to promote the sales of its product and influence the consumers in favour of that product. When advertisements prove successful they cause an increase in the demand for cars.

➤ 2.6 Population may rise.

Due to higher standards of living, there may be low death rates, high birth rates and high immigration in a country. As population increases, there will be more potential buyers of cars.


Step ➌ : Discuss why the demand for cars is not likely to rise in the future.


There are several reasons why the demand for cars may not increase in the future

➤ 3.1 People may prefer other forms of transport

Other forms of transport may become cheaper and of better quality in the future. For example, new railways may be built making travel journeys shorter by train. In this case, there will be a fall in the demand for private vehicles. Also, people may be more concerned for the environment and they may prefer to walk or cycle. Governments may increase taxes on car travel to reduce pollution making car travel expensive.

➤ 3.2 The price of petrol and other complements may rise.

There might be an increase in the price of petrol in the future and people may opt for other forms of transport. Petrol and cars are complementary goods. This means that the higher the price of petrol, the lower will be the demand for automobiles.

➤ 3.3 The prices of other complements such as car parking charges, road tolls and inner-city charges may rise.

The costs of running a vehicle continue to rise well above the average rate of consumer price inflation. Car insurance premiums may also increase at a rapid rate.

➤ 3.4 There may be a recession.

There may be a global recession and higher unemployment in the future. This will reduce people’s confidence in buying a car. Buying a new car is a major purchase and, with macroeconomic conditions remaining uncertain, there will be a lack of consumer confidence. Consumers may opt to postpone their purchase of a new car until their situation improves.


Step ➍ : Conclude.


To conclude, with the introduction of energy-efficient electric vehicles, it is likely that the demand for cars will increase in the future. These vehicles are non-polluting and enable consumers to save on petrol. The government may also subsidise such vehicles. However, if the country experiences a recession, the purchase of cars will most certainly slow down.

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