Question

Suppose that we are analyzing the real estate market (new housing) while the economy moves out of a recession AND at the same time the costs of building such a house/dwelling increase.

Please explain how both changes would affect the final equilibrium P & Q in the real estate market by answering the following questions.

a. Draw a demand and supply graph and show the effect of both changes in the market, starting from an initial equilibrium. Do not forget to label each axis, curves, P, Q, and initial and final equilibrium points. Please explain the reason of each change and make sure that the graph corresponds to your answers and analysis. The graph should be included in the body of your post/thread, not as an attachment.

b. Will P rise, fall or stay the same? Can you predict such result with certainty? Why?

c. Will Q rise, fall or stay the same? Can you predict such result with certainty? Why?

Answer 1

Answer:

Recession is when demand is very low while the supply is high.

a.

The demand and supply curve is shown below, Initially the demand is curve Demand1(D1) and supply curve is supply 1(S1), which has an equilibriem at point A, where price is P1 and quantity is Q1.

After recesssion, the income of people starts to increases, so price of housing increases, this results in demand curve shifting towards right, which is Demand2 (D2) so price and quantity in the real estate market increases to an aggregate point B, which is hown in the graph for price P2 and Quantity Q2.

Supply curve shifts to left to Supply2(S2). where price increaes to P3 for the quantity( this cannot be said for every case, quantity may be different, Im assuming that the market suppliers try to balance price p3 to match quantity Q1 to gain more profit)

b.

Price(P) increases. Suppliers tend to balancethe price and quantity to keep the quantity same for a higher price, to get higher profit, by lowering the supply.

c.

Quantity(Q) will rise, as peoples income increases demand increases, which ultimately leads to increase in spending, so quantity increases