Question

QUESTION ONE [20]

Assume the equilibrium price for rental space for residential occupation is R100/m2 and people seeking homes find this equilibrium price too high. Home seekers therefore lobby the government to pass laws that alter the market outcome by changing the price of rental accommodation. If those seeking rental accommodation are successful in their lobbying, the government will impose a legal maximum on the price at which rental accommodation can be sold.

In terms of the above, discuss the effect on the equilibrium price and quantity of rental accommodation in each of the following cases, using diagrams to motivate your answer:

1.1 Government imposes a price ceiling of R120/m2 for rental accommodation. (8)

1.2 Government imposes a price ceiling of R70/m2 for rental accommodation

Answer 1

The equilibrium price is the price where the minds of consumers and producers agree—that is, where the amount of the product that consumers want to buy is equal to the amount producers want to sell. Thus Price becomes stable at the price equilibrium. It can be better understood by an example. suppose the Company wants to sell its product A for $50. But there is no one to uy the same at such a high price,since the people feel that they might have purchased it around $40. The seller reduces the price by $2 and see that there was demand but not as expected. So they further reduced the price to $45. Here customer might have thought that the price may not fall as high as $40. so they expected that $45 would be also reasonable to purchase the product. Thus we can arrive that $45 is equilibrium price where customers are ready to buy and seller are also ready to sell the product.

In the given scenario, the equilibrium is assume to be R100/m2. Thus it can be said that the Seller are willing to sell the rental space and home seekers are ready to pay at R100/m2. Later on the Home seekers find this equilibrium price too high. Thus they lobby the government to change the price of rental accomodation.

i) If govt caps the price at R120m2

Here the price of $100m/2 can be increased by the seller at R120m2 but since the price of R100/m2 was the also not considerable for home seekers, they may not seek for R120m2. Thus seller may be forced to keep the price at R100m2. The overall demand may fall since the home seekers find this equilibrium price too high. This can be seen in following diagram. the new Demand line where demand reduced with the increase in price.

ii) If govt caps the price at R70m2

Here the cap price is reduced to R70m2. The seller will be forced to sell at R70m2. Home seeker were findng the old price too high. Now since the price is reduced they wil now demand for rental space more. Even there are chances new buyers may come in since the price is reduced. This can be seen in following diagram, the new Demand line where demand increased with the decrease in price.