Question

A real state boom results in a surge of condominium construction in Metro Manila. Use the demand and supply model to explain this event. Suppose you observe the rise in the quantity of condominiums bought and sold and a rise in the price of condominiums. What can you conclude about the shifts in the demand and supply curves?

Answer 1

Let us consider the situation before the real estate boom in Metro Manila.

As we can see, the equilirium price and quantity are P₁ and Q₁ respectively.

Now, let us assume that there is a real estate boom. We observe that there has been a rise in the quantity of condominiums bought and sold and a rise in the price of condominiums. It is reflected by a right ward shift in both the supply as well the demand curve. However, for the price to increase, the magnitude of shift in the demand curve should be greater than the magnitude of the shift in supply curve.

As we can see from the above diagram, both the supply and the demand curves have shifted rightward. However, the magnitude of the shift is greater for the demand curve as compared to that of the supply curve. The results in a new equilibrium price ( P₂ ) and the new equilibrium quantity ( Q₂ ). We also observe that P₂ > P₁ and Q₂ > Q₁.

Therefore, we can conclude that both the demand and supply curve have shifted rightwards with the magnittude of the shift being higher for the demand curve.