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Brooks Wilson's Economics Blog: Driving Costs and the Demand for Cars

Monday, February 28, 2011

Driving Costs and the Demand for Cars

Gasoline is an important complement to cars.  Other things equal, as gasoline prices rise, miles driven and car sales decline, but more can be learned by separating cars into makes and models, making one a substitute for another.  But the strength of that relationship depends on a number of characteristics.  One make and model, a Honda Civic, may be a strong substitute for another, a Toyota Corolla, and a weak substitute for another, a Chevy Tahoe. 

With the price of related goods for the demand car model in mind, I constructed a table based on the per mile total cost to operate the seven different models over five years assuming the cars were driven 15,000 miles per year.  All the costs except fuel were taken from Yahoo Autos.  Fuel costs were estimated using the average of EPA City and Highway estimates at gasoline price beginning at $2.75/gallon, increasing at $.25 increments to $4.25/gallon.  Fuel economy ranged from 18 City/27 Highway for the Ford Taurus to 51 City/48 Highway for the Toyota Prius. 

This is a simple model; the only cost that changes as gasoline prices rise is fuel.  I expect that other elements of cost would change as the price as well, For example, the price of fuel efficient cars would rise relative to less efficient automobiles both in the new and used markets.  Because I don’t have data to predict the changes in new car purchase price and the used car sales price, I did not modify Yahoo’s cost estimates.  The graph of the per mile total cost of the seven vehicles yielded some expected results and some surprises.  As expected, the total cost per mile of the hybrids rose more slowly than non-hybrids, but not dramatically so.  I anticipated that the total cost per mile of the non-hybrids would be lower at low gasoline prices but would be higher than the hybrids at high gasoline prices.  The Civic and the Fusion both came in non-hybrid and hybrid models and in both cases, the hybrids had lower total cost per mile than their counterparts at $2.75, and that cost differential grew as prices rose.

The reason that gasoline prices did not influence total cost per mile is that they are a relatively small part of overall cost.  Fuel cost never rose above 33% of total cost (Mazda 3 Sports i), and were as low as 17% of total cost at $4.25/gallon (Toyota Prius).  In general, models that were relatively less expensive at low gasoline prices were less expensive at high gasoline prices.

Consumers will try to lower the cost of owning a car, but how?  A more sophisticated inquiry might study the complementarity of makes and models.  Is a minivan a stronger or weaker complement to a large SUV than a crossover?  Likewise, is a compact hybrid a stronger or weaker complement to a compact than a subcompact?


  1. Kersten Gonce1/3/11 5:26 PM

    I agree with saying that "Consumers will try to lower the cost of owning a car." But, consumers will have to balance the price and sacrifices put forth to get the vehicle of their choice. To me, a mini van is a stronger complement to a large SUV than a crossover only because most mini van models are made with very good fuel efficiency. An SUV may hold more gallons, but the rate at which the fuel is burned also needs to be considered. A compact hybrid is a stronger complement to a compact than a subcompact, because compact hybrid is a fancy word for really, really, really good fuel efficiency vs subcompact. There are many factors we face when we have to examine the cost of gas prices and the cars we drive. Even though more people are looking for better fuel efficient cars, there are still the few that will drive what they want and not make a sacrifice.

  2. From a money stand point, wouldn't you think the cars that get the best gas mileage would be some of the most expensive cars? I find it interesting that some of the cars that get the best gas mileage are some of the least expensive cars. To me, it is a win-win situation. For my family of 4, I have no need for a bigger vehicle and would like to spend the smallest amount of money as possible on gas. I am glad they haven't raised the prices of cars that get good gas mileage!

  3. I do agree that more people want to buy a more fuel efficient cars. However, people are going to drive what they can afford to drive. If a family can only a ford a 2000 Chevrolet Suburban for a family of 5, then that is what they are going to get. Many people can't afford to buy new hybrid cars. That is why the average person feels the effects of gas prices because they can't afford fuel efficient cars. That family will just have to pay the money and get 7 miles to the gallon.

  4. Jennifer Boen1/3/11 8:45 PM

    I think that the best way to judge a car would be for the best car for the size of family. I personally prefer an SUV because I feel safer with my family in one even if I do pay more for the gas to fill it up. But, in all reality, I think getting a vehicle that gets more miles per gallon would be more cost efficient as you would not spend as much on gas. But, you also have to consider the size of the gas tank. On the other hand, I would rather have a diesel truck for the reason that you can go almost 500 miles per tank of gas which means in all honesty, you don't spend as much.

  5. carla wilson1/3/11 11:26 PM

    I personally drive a SUV and pay way more to fill up at the tank than my mid size car. I use my SUV for traveling as i get more gas milage per gallon on the higway. Driving a economy car cost less to fill up at the tank as would be more cost efficient and I drive my economy car back and forth to worth and it has saved my alot of money on gas.

  6. I personally think the Honda Civic is the most efficient car out there for people. You can get a spacious model, all of them get terrific gas mileage, and they last forever. Although the Honda Civic costs a good amount of money for just a mid size car, the money you save on fuel makes up for it and you will benefit in the long run. Diesel is expensive and they haven't perfected ethanol so unleaded is the way to go! The cost of any hybrid is increasing and many people cannot afford the prices and are forced to buy bigger cars of trucks.

  7. Nice economy. I hope this will be really helpful to me for my financial condition towards vehicle.Thanks for the lovely post.

  8. Morgan Heeke11/7/11 12:26 AM

    By keeping the cost of fuel high, we are encouraging finding other sources of energy. Gas and cars are currently complements, but maybe in the future we can consider solar power and cars complements. The United States is the only country dominated by SUVS, which says something about our lifestyles. In Europe, there is such high fuel tax that is unreasonable to drive an SUV.

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