Hybrid vehicles have been receiving a lot of publicity in the past few years, but sales have been merely modest. Historically, California has been buying the most hybrids as a state. Currently, they possess 25% of all the hybrids registered in the United States. According to the brief article in Business Week entitled “Hybrid Loving States,” California’s high percentage can be attributed to their early adopter attitude and state government offered incentives. It should be noted that the second place state in these rankings is Florida, with only 5% of registrations. It may seem like this is a large number of vehicles, but according to a list of questions and answers compiled by Stuart Brown, there were only 100,000 hybrid vehicles sold in 2004.
	The U.S. Department of Energy has had an idea to increase knowledge and awareness of hybrid vehicles. They have started a contest called Competition X in order to publicize the vehicles, and make them as cost effective as possible. It was initially opened to technical schools and the prize is $90,000. In an article by R. Johnson that elaborates on this competition, it is noted that there are two parties extremely interested in the vehicles: 
This very interesting competition will be decided in about one year’s time when the grand prize will be presented. What effect will this have on the demand for hybrid vehicles? Hopefully it will prove their cost effectiveness and result in an increased demand due to the rising price of oil (a complimentary good to the automobile).
	Brown does note that sales doubled in 2005 even considering there is a premium for hybrids of about $3,000 on top of the regular cost of a typical car. As illustrated by the black lines in figure 1. The line P represents the current price of hybrid vehicles. Figure 1 is an industry model where the market clearing equilibrium is the point where Pe (equilibrium price) and Qe (equilibrium quantity) intersect. The $3,000 premium for hybrid vehicles accounts for the higher “P” of a hybrid vehicle. As shown in the diagram, it is clear that the quantity demanded is very few compared to regular vehicles. The question is, why are auto companies continuing to manufacture hybrid vehicles? A very important non-price determinate of supply is in effect: expectation. Auto manufacturers expect demand for hybrids to steadily increase. According to a Global Refining and Fuels Reports article, Toyota is expecting a continued increase because they have announced that they will be making a Camry hybrid in the United States. This will be the first hybrid vehicle by Toyota to be manufactured on US soil.
	To further explore the current manufacturer status on car production, please look at figure 2. This figure is in approximation of the current firm schedules based on the current market. We can see that the firms are continuing production because firms feel they are successfully minimizing their losses in the short run, with hopes of long run normal profits. The marginal cost is equal to the marginal revenue, which is telling the firm to continue output. The fact that the Average Total Cost is greater than the Marginal Revenue means that, on hybrids cars, companies are probably making less than normal profits. Finally, because Average Variable Cost is below Marginal Revenue, the company should continue production in the short run.
