Impact of COVID-19 in the Car Industry

Kelly Blue Book reported that Americans purchased a new car in July 2021 for an average of $42,736 versus $39,513 in July 2020. One of the key reasons for the increase in the price of new cars is the global shortage of semiconductors – a key component used not only in new cars, but also in the production of other goods like smartphones and electronic appliances like microwaves and washing machines. The increase in demand for new cars was compounded by the relaxation of pandemic lockdowns as more individuals return to schools, workplaces or for leisure trips.

Consequently, demand moved to the used car market, which is a substitute good for new cars. However in the used car market, Cars.com noted that the median listing price for a used car increased by 34.3% since August 2020. The car rental market is also not spared. The lockdown at the beginning of the pandemic lead to the top car rental company, Hertz, to file for bankruptcy. Now, with the reopening of the economy, Hertz is re-entering the hot car-rental market as road trips gains speed.

Questions/Discussion:

1. New cars, used cars, rental cars – classify these 3 types of goods into normal goods, inferior goods, and luxury goods? Would your classification change post-pandemic?
2. Given the scarcity of semiconductors in the production of new cars, what is the effect on the supply curve (e.g. movement or shifts, which direction)? Use the factors of supply (e.g. price of resources, technology, number of sellers, etc.) to explain.
3. Could ride-sharing services and public transportation (e.g. buses, subways) be a good substitutes during this pandemic? Do explain.
4. Self-reflection: If you are looking for a car at this present moment, which type of car – new car, used car or rental car – will you consider? Do explain.

Sources: Pixabay.com: Car Doors Industry Factory Store, Kelly Blue Book: Average price paid for a new car breaks record for 4^th consecutive month, Cars.com: How used car prices finally plateaued?, BBC News: Why is there a chip shortage?, CNBC: Hertz bankruptcy and a distressed rental car market means more pain for U.S. automakers, CNN Business: Hertz emerges from bankruptcy