Question

In: Economics

Find the flaw in the following argument made by a business analyst in a small town:...

Find the flaw in the following argument made by a business analyst in a small town: "As the number of rental units has increased in the city, the rent prices have decreased . But a lower price will increase demand for the rental units, pushing the price prices up again”. Provide a short but precise answer!

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Expert Solution

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Question:

Answer:

Normally, when demand increase price increase or when price decrease demand increase and vice-versa. When price increase supply increase and vice-versa. Demand and and supply in howsing market is depends upon the follwing things. like, economic growth, income level, economic outlook, government policy, interset rate, banking system etc. When these things are favorable for the investors then its increase demand and increasing demand increase prices. Increasing prices increase supply. As an  argument made by a business analyst in a small town: "As the number of rental units has increased in the city, the rent prices have decreased . But a lower price will increase demand for the rental units, pushing the price prices up again”. This is right when supply increase and demand constant then increasing supply decrease price level and vice-versa. When price will decrease then demand for rent units will increase at lower price. When demand for rental units will increase, it will increased price level.

Graphical representation:

You can see increasing supply shift supply curve right from S1 to S2 and new equilibrium point is E2. Its decrease price level at the point P2. When price decrease its increase demand and demand curve shift right from D1 to D2 and new equilibrium point is E3 where the price level reached at its previous level P1.

Thank You

Rahul Sunny answered 1 year ago
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