Background

You are going car shopping today. You will examine what you know about your favorite cars, what you want to know, later, you will document what you learned. There are many factors that determine which is right car for each person, and pricing depends on which cars are most popular with consumers, as well as a few other factors. More goes into manufacturing, selling, buying, and owning a car than meets the eye.

1. KWL Sheet.

K = Know. Share what you know about the cars you like. Describe your "dream car," but in this scenario, price does matter. Consider what you plan to do in the next five years, and how this car fits into your plans. For example, if you are going to college in Colorado, you might prefer a rugged car, while a student moving to Hollywood to pursue an acting career might prefer a convertible.

W = Want to Know. What do you want to know about a car before you purchase it? Will you consider things like maintenance costs or carbon footprint?”. Insurance costs vary from car to car, and even from person to person. For example, people with college degrees pay less for car insurance than those who do not have one. Some companies even give students with good grades discounts, but they do ask for documentation!

2. Cost
  • Mentally add up the price of their dream car, interest on a car loan, and develop an estimate of what they think it will cost to run and maintain a car for 5 years. Assume the car comes with a 3-year warranty.
  • Fill in your Car Buying Questionnaire.


3. View the video from July 30, 2010, entitled, “Will U.S. Auto Industry Manage to Survive Recession?
  • Questions and Points to Ponder:
  • What are ideas from the video that could raise the price of a car?
  • Cost-Push Inflation is inflation caused by rising costs of production.
  • Why would the President support the auto industry?
  • Pay special attention to car the factory worker showed President Obama as a model. Why do you think the Chevrolet Volt, a battery operated car, was chosen?

4. Consider the Following:

Car prices are driven by a number of factors, including the cost of production, the cost of raw materials, and labor costs. Some people prefer to buy cars manufactured in the United States. The video mentions that one auto manufacturer, GM, has kept its business in the United States and will sell stock again soon. However, Chrysler is controlled by an Italian automaker, called Fiat. Others think the safest car will always be the best choice and will bring down insurance costs. Would you spend more on a car that ran on less gas? An economist would say that would depend on the price of gas, and what kind of gas the car required. If less gas is used in cars because they rely on more battery power, demand for batteries will increase. Would this have a positive impact on the American economy, if those batteries were manufactured in the United States?


When a government policy is designed to help business to generate a supply of a product, it is called supply-side fiscal policy.



As the cost of producing products increase, a factor called cost-push inflation puts the consumer, the car buyer, in a position where the sticker price of their favorite car could increase.



However, if there are too many cars on the lot, you may find the prices are subject to deflation, which is a decrease in price due to an over abundant supply. While finding a car for sale is not a challenge, when gas prices go up, the demand for cars that consume less gas increases, as well. When there is not enough (affordable) oil, there is a scarcity of a resource, which in this case, creates a demand in need for fuel-efficient cars. A consumer will not save money if they spend too much for a car that saves money on gas, though.



Consumers also have to consider the cost/benefit analysis of making a major purchase. Will they have to pay too much in interest on a car loan that they car has a dramatic decrease in value by the time it is paid off? Is the way the buyer will use the car consistent with the most economical way to drive it? Will maintaining the care add too much to the total cost of the vehicle over the years?



5. Things to Consider with your Dream Car
  • Reconsider their dream car choices. Would you prefer a car that uses battery power? Have you changed your mind about the manufacturer? There are no “wrong” answers.
  • Write down what you think the cost of your car will be over 5 years. This should include the price of the car, interest on a loan, gas, and maintenance.
  • Once you have written down your estimate on the Car Buying Questionnaire, if plan to finance their car over 5 years, to keep monthly payments down, you will have a higher rate of interest from the bank. This will add to what you pay, in total, over time.
  • If you plan to drive more than 15,000 miles a year, which is about average, you may have more maintenance to do over that time period.
  • Fuel efficiency is more important to economists when gas prices increase.
  • "Stop and go” driving (traveling short distances, such as less than 2 miles, many times a day) can create wear and tear on a car.

6. Research
Research the following, and to complete the Total Cost of Ownership worksheet:
  • What is the price of your car? (www.edmunds.com)
  • If you have a 5-year loan, estimate the amount of interest you would pay on their car at a rate of 4.5%. If you have a 3-year loan, use 4.0% as an interest rate. Remember that loan rate should be calculated as 4.5% or 4.0% annually, not monthly.
  • You can use a tool such as the simple interest calculator: http://www.webmath.com/simpinterest.html
  • Or use the formula I=PRT, meaning Interest equals Principal (what you borrow) times Rate (4.5% or .04) times Time (60 months). So you should add this number to the price they pay for their car.
  • As an alternative, you can also research interest rates at a site like: http://www.bankrate.com/auto.aspx and use more current numbers.

Enter these numbers into the Total Cost of Ownership Worksheet.
  • Find the cost of gasoline per gallon, and what the average gas mileage of their car is.
  • Estimate the maintenance fees for your car, using a tool such as the True Cost To Own calculator at Edmunds.com
  • Plug this data into your worksheet, complete computations, and determine the price of your car over 5 years.
  • When you have a total, enter it on the Car Buying Questionnaire, near their estimate.

8. KWL

L = Learned. Answer this question: What have you learned from this activity?

9. Turn in Worksheets (Car Buying Questionairre, Cost of Ownership Worksheet and KWL)

10. If you finish early, study for the Final Exam.