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Chapter 17 Cars

Looking into Cars

Cars are so common that we rarely give them a second thought. If you live in the United States, then you either already have a car or will most likely have one in a few years’ time; over 90 percent of households in the United States either own or lease a car. Although other countries do not have quite the same levels of car ownership as the United States, there are more than half a billion automobiles in the world.

The familiarity of the car is so great that it is easy to forget how the automobile transformed the world. The automobile made modern cities and suburbs possible because people were no longer obliged to live close to where they worked. The automobile made it easier to transport goods from place to place, dramatically altering patterns of trade in the global economy. At the same time, automobile emissions have degraded the air we breathe to the point where they sometimes seriously damage people’s health. Indeed, because emissions also contribute to the accumulation of greenhouse gases in the atmosphere, the automobile may be changing the very climate of the planet.

Although you may own a car, it is likely that you are unfamiliar with how it works. Half a century ago, car owners were typically very knowledgeable about how their vehicles operated. They needed to be because cars broke down frequently. People knew how to adjust spark plugs, clean distributor caps, and so on. But the modern automobile is a remarkably sophisticated and complex piece of engineering. Today, it is unlikely that an owner of a modern-day car knows how to do much more than very basic maintenance. Even car mechanics rely on computer diagnostics to perform repairs.

Just as the product itself has become increasingly complex, so too has its method of manufacture. In the early years of the 20th century, cars were produced in small numbers and largely by hand. In 1913, however, Henry Ford introduced mass production of cars at Ford’s Highland Park plant.The Library of Congress has an extensive discussion of Henry Ford, including photos of production in 1923 at By the middle of the 20th century, cars were typically produced on assembly lines. In contrast to the early years of car production, there were far fewer workers at this stage of the production process.You can find more details at How Stuff Works, “1957–1959 Ford Fairlane 500 Skyliner,” accessed March 14, 2011,

If you were to visit the production line at a modern automobile manufacturing plant, you would hardly see any people at all. Modern production uses a great deal of capital and relatively little labor. Computerized robots perform manufacturing roles. Yet despite the relative absence of workers on the production line, over one million workers are employed in this sector of the economy in the United States.Basic information about firms and workers in this sector comes from the Bureau of Labor Statistics, “Career Guide to Industries, 2010–11 Edition,” In 2006, about 360,000 jobs were associated with the production of automobile parts alone.This number is from a Bureau of Labor Statistics study of employment in the automobile parts industry: Benjamin Collins, Thomas McDonald, and Jay A. Mousa, “The Rise and Decline of Auto Parts Manufacturing in the Midwest,” Monthly Labor Review Online 130, no. 10 (2007): 14–20, accessed March 14, 2011, In the 21st century, though, there have been significant job losses in this part of the economy.

Road Map

This chapter is different from others in this book because it is a capstone discussion. We use the automobile industry to illustrate the different ideas we have explained in the book. We also use this industry to provide further examples of how to use the different tools we introduced in previous chapters. Whereas other chapters were largely self-contained, here we will repeatedly remind you of ideas that we have already studied.

We begin our look at cars in a familiar way, using the supply-and-demand framework. All of us who own cars reside on the demand side of the market. We make choices about the type of car we want, whether to buy a new car or a used one, and when to replace it. We also make decisions about related products like gasoline and insurance. The supply side of the car market illustrates technological progress, enormous growth in product diversity, the impact of trade on domestic markets, and the social costs of automobiles. We examine some decisions of automobile producers, including where to locate their operations, why they introduce new models, and what price they should set.

We then study the equilibrium of the car industry. The US car industry began around the start of the 20th century, survived the Great Depression of the early 1930s, and has been transformed by international competition. Understanding these dynamics provides a perspective on other industries. After understanding industry equilibrium, we look at the variety of government policies that impact this industry, including trade and environmental policies.