The Determinants of Demand for

Hybrid Cars
 Overview
 Objectives
 Hypotheses / Variable Examined
 Software
 Approach
 Model
 Variables
 Statistics
 Results
 Policy Implications
 Objectives
 To develop an econometric model and analyze historical
data sets to determine which variables explains what factors
drive the demand for hybrid vehicles in order to confirm or
deny public speculation.

 To maximize the statistical significance of the model in

order to provide forecasters with a working model that can
be used to make predictions about future demand for hybrid
cars.

 To provide the environmentally conscience public,

automobile industry, and law makers a foundation upon
which to make policy decisions based on objective
reasoning.

 To provide a solid foundational model upon which future

research projects can build on.
 Hypotheses
 H1: The demand for hybrid cars is explained
by gas prices.
 H2 : The demand for hybrid cars is
explained by the Producers Price Index for
automobiles.
 H3: The demand for hybrid cars is explained
by the personal consumption on
expenditures for automobiles by the US
population
Variables examined

Dependent variable: Demand for hybrid vehicles

 Economic Indicators  Energy Indicators

– PPI for motor vehicles
– Personal consumption
on motor vehicles
– Bank loan rate
– Consumer credit
outstanding
– Unemployment rate
– Price of gasoline
– Barrels of gasoline
consumed
– Total energy
consumption of US
population
Variable Identification and Definition
Variable Type Hypothesized Sign
 Demand for Hybrid Cars Dep
 PPI for motor vehicles End Neg
 Personal consumption on End Pos
motor vehicles
 Bank loan rate Exo Neg
 Consumer credit outstanding Exo Pos
 Unemployment rate Exo Neg
 Price of gasoline End Pos
 Barrels of gasoline consumed End Pos
 Total energy consumption of End Pos
US population
 Software
 WinORSfx was used to develop the model.
 Availability of Economic data from
Economagic
 Extensive ability to determine statistical
significance.
 Approach
 Monthly data sets were used from 2004 – 2007.
 Stepwise regression was run to determine which variables
to eliminate from the model.
 Remaining variables were examined for practicality.
 Ordinary Least Square method was used to test the
remaining variables for multicollinearity,
homoscedasticity, explainability, and serial correlation.
 First Difference was run to attempt to eliminate serial
correlation.
 A final model was assembled.
 Determinants Model

Qx = -167376 + 758*P + 163.20*Pgas + .104C

Qx = Demand for hybrid vehicles

P = PPI for automobiles

Pgas = Price of gasoline

C = Personal consumption of automobiles

 Predictive Ability of Model
Predictive Ability (OLS)
Dependent Variable: Total Hybrid Sales

32,500

29,250

26,000
Actual & Predicted

22,750

19,500

16,250

13,000

9,750

6,500

3,250

3 6 9 12 15 18 21 24 27 30 33 36 39 42 45
Observation

Actual Predicted
 F-statistic

 The P-value 0.00001 is significantly below

the critical value, 0.05
 The model is statistically significant above
the 95% confidence interval

F value: 44.63
P value: 0.00001
 Coefficient of Determination
 Demonstrates that a high degree of variability in
hybrid sales can be explained by variation in the
independent variables

 Root MSE 3489.600

 SSQ(Res) 426205816.031
 Dep.Mean 15818.923
 Coef of Var (CV) 22.060%
 Multiple R 89.038%
 R-Squared 79.278%
 Adj R-Squared 77.502%
 Multicollinearity

 No evidence of multicollinearity is present

in the model (VIF<10)

Average VIF = 1.037

 Parameter VIFs
Variable: VIF
Price of gasoline 1.040
PPI of automobiles 1.053
Personal consumption on 1.018
Automobiles
 Constant Variance
 White’s Test shows that the model is
homoskedastistic

White’s Test = 8.32

P-Value for White’s = .502

 Constant Variance Graph
Constant Variance Test (OLS)
Dependent Variable: Total Hybrid Sales
14,700

12,600

10,500

8,400

6,300
Residual

4,200

2,100

-2,100

-4,200

2,413 4,826 7,239 9,652 12,065 14,478 16,891 19,304 21,717 24,130 26,543 28,956
Predicted
 Auto Correlation

 Durbin Watson test shows evidence of Auto

Correlation
 Ho: Rho = 0
 Rho: Pos & Neg Reject
 Rho: Positive Do Not Reject
 Rho: Negative Reject

 First difference solution attempted; resulted

in a new R-squared value of .277
 Normality of Error Terms
Normal Probability Chart (OLS)
Dependent Variable: Total Hybrid Sales
14,700

12,600

10,500

8,400
Sorted Residual

6,300

4,200

2,100

-2,100

-4,200

-9,000 -7,500 -6,000 -4,500 -3,000 -1,500 0 1,500 3,000 4,500 6,000 7,500 9,000
Expected Residual
 Elasticities
Variable Parameter Estimate
Price of gasoline 2.89
PPI of automobiles 8.38
Personal consumption on 3.87
Automobiles
 Elasticity Implications
 Income elasticity
– Hybrids are a “luxury” item
– Elasticity is >1
– As income increases, Qx increases
 Cross price elasticity
– Gasoline and other automobiles are substitutes
– Elasticity is >1
– As prices of gasoline and other autos increases,
Qx increases