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Price elasticity of demand - Tesla cuts prices by up to a fifth to boost demand

Geoff Riley

15th January 2023

Will the decision by Tesla to cut prices by more than 10% in the UK and up to 20% across Europe lead to a significant expansion of demand? This is a perfect short case study in price elasticity of demand!

On the surface, demand for electric cars should continue to see strong growth this year and next. High fuel prices are just one factor creating a possible substitution effect towards models produced by Tesla and other suppliers in the UK.

But the steep fall in real disposable income also causes an income effect and electric vehicles can be expected to have a high income elasticity of demand.

And prices at electric charging stations have also moved sharply higher in recent months. Soaring energy prices has seen the cost-per-mile of using public rapid chargers jump by more than 60 per cent and overtake petrol prices although home charging remains cheaper.

According to the latest figures from the RAC Charge Watch, drivers using rapid chargers now pay 20p per mile for their electricity, based on consumption of 3.5 miles per kWh. That compares to the 17p per mile cost of fuelling a petrol car capable of 40mpg and 20p per mile for a diesel with the same economy. Ultra-rapid chargers cost 21p per mile.

The macroeconomics suggests that 2023 will be a difficult year for electric car manufacturers as millions of consumers delay a new vehicle purchase due to growing economic uncertainty.

What are some of the key factors affecting demand for electric vehicles?

There are several factors that can affect market demand for electric vehicles (EVs):

  1. Availability of charging infrastructure: The rising availability of charging stations and the ease and cost of using them can make EVs more appealing to consumers, which can lead to higher demand.
  2. Income: Higher-income individuals may be more likely to purchase EVs, as they may be more able to afford the higher upfront cost of the vehicle.
  3. Government incentives: Government incentives, such as tax credits or rebates, can make EVs more affordable for consumers and increase demand.
  4. Environmental concerns: If consumers are more environmentally conscious, they may be more willing to purchase EVs, even if they are more expensive than traditional gasoline-powered vehicles.
  5. Range anxiety: The range of the vehicle and the time to charge it can affect the consumer's decision to buy an EV. Longer range vehicles or faster charging time can help address this concern.
  6. Brand reputation: Brand reputation can also play a role in the price elasticity of demand for EVs. Consumers may be more likely to purchase EVs from established automakers with a strong reputation for producing quality vehicles.
  7. Alternative fuel prices: The price of diesel, and other alternative fuels can also affect demand for EVs. As the price of these fuels increases, the price gap between EVs and traditional vehicles will decrease and make EVs more attractive to consumers.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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