Question

what would an S-D graph (on market for housing) look like with an impact from “a worsening affordability”. This means as houses become more expensive (less affordable) how will the supply and demand graph change and why?

also what would happen to producer and consumer surplus?

Answer 1

In this case houses becomes more expensive. When houses becomes more expensive it appears to be less attractive in the eyes of the customer. As a result of which the demand of the houses decrease. In such a case their will be a change in the demand curve . Now if we want to know what would be the supply demand curve for this particular situation, it would be something like this. The decrease in demand will be greater than the decrease in supply . This condition comes from the fact that the demand curve shifts leftwards whereas the supply curve shifts rightwards. As they move in opposite directions, the final market conditions are deduced by pointing out the magnitude of their shifts.

• The decrease in demand > increase in supply

When the decrease in demand is greater than the increase in supply, the relative shift of demand curve is proportionately more than the supply curve. Effectively, both the equilibrium quantity and price fall.

    If demand increases, producer surplus increases. If demand decreases, producer surplus decreases. Shifts in the supply curve are directly related to producer surplus.

If demand increases, producer surplus increases. If demand decreases, producer surplus decreases. Shifts in the supply curve are directly related to producer surplus.