Question

The latest electric car is expected to be released in Australia shortly at a very affordable price. What impact might this have on the market for cars which run on petrol? Justify your answer.

Answer 1

In the most basic economic terms, we can consider electric cars or vehicles (EVs) to be substitutes of cars that run on petrol and diesel. Traditionally electric cars have been more expensive than cars that run in traditional fuels, due to the cost of producing the batteries that run the EVs, as they are made from raw materials which are relatively expensive to procure. However, with the introduction of an EV that is extremely affordable, the demand for cars that run on petrol is expected to drop.

Not only do EVs represent environmental friendliness they also have several other benefits such as electric cars are more energy-efficient as they convert an average of 61% energy into vehicle movement whereas fuel vehicles only do 21%. EVs are also high-performance and low maintenance as it costs a lot less to maintain their motors than traditional cars. On an average, an EV costs around $500 to operate while average costs for gas-powered vehicles are almost twice of that, around $1200.

One must also emphasise on the affordability of the car when associating it with the laws in Australia as the country has a federal luxury car tax that is applied on any vehicle that's of value above a certain threshold. Such taxes can be a disincentive to purchase expensive EVs, but the new affordability should be a mitigating factor and could even lead to such a tax not being levied on the new EV.

Overall, the entry of this new affordable EV is bad news for petrol cars, as this product could disrupt the market and drive a substantial market share away from petrol car manufacturers.