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In my application of theory I have spoken about certain things making demand rise

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Introduction

A market is a meeting of buyers and sellers, where goods/services are exchanged for other goods and services. It is therefore a system of exchange based on demand, supply and price. The exchange is normally indirect, the items being exchanged for money. Therefore houses would be bought for money. This money can be used to buy more houses. Money acts as a medium of exchange and a measure of value. Demand is the amount of people willing to purchase a good or service at a given price. The fundamental law of demand is that an increase in price will result in a decrease in quantity demanded whereas a decrease in price will results in an increase in quantity demanded. I have shown this below using a demand curve. The graph shows that 30,000 items are demanded when the price is �10. If the price falls to �5 quantity demanded will increase to 40,000. The curve can only be drawn when the price elasticity of demand of the product is known. ...read more.

Middle

A change in supply will occur if the price of a good changes. This is determined by the demand for a good. This can be shown using a graph. A) INCREASE IN SUPPLY B) DECREASE IN SUPPLY A - a change from S1 to S2 shows that at a price of �10, businesses will supply 35,000 items. B - a fall from S1 to S3 means that firms will only supply 25,000 items. Ultimately the relevance of demand and supply curves is that when combined we can calculate the market price. The equilibrium market price is �10 and consumers demand and producers supply 30,000 items. Prices can move freely. For example if the price rose to �15. - Consumers demand 20,000. - But producers supply 40,000. - Thus creating a surplus. - This causes the price to fall. - This causes an increase in quantity demanded. - And reduces quantity supplied. - Equilibrium is re-established. Although in this explanation of supply and demand I have looked at goods of a lower value than houses the same theory applies but on a larger scale. ...read more.

Conclusion

After the rise we can see there is an upward shift. This is illustrated by demand 2. Nevertheless we should note there is only a small change in supply. This is because the supply of housing in the market is fairly inelastic. This is because it takes people time to realise that they could make a good return on their property by putting it on the market. Also some people may want to wait until the market is at its peak. When there is such a shift in demand we can see a colossal rise in prices yet little change in the quantity of houses traded. It is only when the supply is increased that this rise in price is curbed. The diagram can observe this. Clearly as supply is increased the price falls. This concept also draws on the issue that I have raised about house builders keeping supply low so that prices remain high. If they were doing this, it would make sense as most businesses objectives' are predominantly about profit maximisation. This is the desire to make the greatest return on capital employed. Nevertheless I question whether they are deliberately doing this. I have argued this case further in my conclusions. ...read more.

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