Saturday, June 9, 2012

Porsche for sale......

I was going through some car ads today not because I am looking to buy a car but because I am what you would describe a gearhead. I noticed that several luxury cars were being sold at bargain prices. A Porsche Cayienne for 20000 Euros, a BMW X5 for 14000 Euros.

These are amazing prices especially if you consider that 3 years ago these cars were fetching twice as much on the used car market. What would cause their owners to sell them so cheap?

Given, these cars have high maintenance costs. Also they are expensive on petrol. But these cars are usually owned by more wealthy individuals.

This got me thinking. Blame the crisis on loosing money from investments. Blame the crisis for wanting to buy a car that runs cheap. But would you willingly take a huge loss by selling your Porsche Cayienne at a sixth of the retail price? Why not at half or third of the retail? What causes the price of luxury cars to decline by this much?

The answer lies in the marginal utility of income. The level of utility or enjoyment derived from cash inflows. I say cash because income can take different forms. During times of economic depressions the need for liquidity rises and so does the marginal utility of cash.

This term is coined after observations in everyday life like...used car prices. Those that have a high marginal utility of cash, that is they place higher relevant importance on extra cash received, are likely to sell their used cars at lower prices.

Those that have a low marginal utility of cash are likely to sell at higher prices and will be unwilling to take huge losses on their car investment.

How much would you sell your car? Food for thought.....

1 comment:

  1. I just got out of sleep and Im already reading your blog. It signifies something! Really useful blog. Thank you!

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