New cars, used cars and substitutes

One of the shift factors for demand is the price of a substitute. Substitutes are two different goods that can both be used for the same purpose. I always liked to use products that were definitely different in class as examples. I never liked, for example, Coke and Pepsi. They can be viewed as just different brands of the same product.

But maybe the differences between used and new cars is enough in this case. The article says that with the price of new electric cars going down, the price of used electric cars also fell. That is because when the price of a substitute falls (assuming new cars are substitutes for used cars), the demand for the good in question (used cars) falls or shifts to the left. That drives the price down.

See Used EV prices are collapsing — and Tesla is the reason why: EV prices are collapsing more than those in the overall used car market by Pras Subramanian of Yahoo Finance. Excerpts:

"According to auto research firm iSeeCars.com, used EV prices are collapsing more than those in the overall used car market. In the firm’s June 2023 report, the data shows that used EV prices have fallen by nearly 30% year over year, with price drops actually accelerating from 8.8% in January to 16.8% in March and to 29.5% in June. The firm analyzed transactions from over 1.8 million one- to five-year-old used cars from the June 2022 and 2023 time period to capture the results.

“A year ago, used EV prices were on the upswing, rising faster than the average used car,” said iSeeCars executive analyst Karl Brauer in the report. “Electric vehicle prices are now falling at nearly 10 times the rate of the average used vehicle, reflecting a clear shift in EV supply and demand.”

Meanwhile, the overall used car market is stabilizing according to iSeeCars.com, with overall prices down 3.6% year over year in June, following price drops of 2.9% in May and 3.6 % in April.

The biggest reason behind the fall in used EV prices? Tesla’s (TSLA) massive price cuts earlier this year put extreme downward pressure on the used EV market, which is dominated by Tesla EVs like the Model 3 and Model Y.

“With Tesla cutting prices on new models its used EV values have tumbled. And because Tesla makes up the bulk of the used EV market the dramatic drop in Tesla values has impacted the entire category,” Brauer said."

The article does mention some other factors. But it reminds me of Star Wars: A New Hope (episode IV) when Luke sold his X-34 landspeeder so he and Obi-wan could pay for their ride on The Millennium Falcon. Luke was not happy about the low price he got. So he said "Ever since the XP-38 came out, they just aren't in demand." That might have meant that the price of new landspeeders had fallen, reducing the demand for used ones.

The article also mentions "fuel prices stabilizing this year." If that means that gas prices are lower or have not fallen, then the total price of owning and operating a gas powered car has gone down (or at least stopped rising). Since gas powered cars are substitutes for electric cars, this would also reduce the demand for electric cars (both new and used).