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Microeconomics Commentary

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Demand is the willingness and ability to buy specific quantities of a good at alternative prices in a given time period. The law of demand states that the quantity of a good demanded in a given time period increases as its price falls. The market demand is determined by taste (desire for this and other goods), expectation (for income, prices, prices, and tastes), income (of the consumer), price of substitute goods, price of complementary goods, and the number of potential buyers. Price elasticity of demand (PED) is the responsiveness of quantity demanded to changes in price given. The number of substitutes, price relative to income, necessity, and time are all determinants of PED. The greater the availability of substitutes, the higher the PED is. Also, the PED of demand declines as price moves down the demand curve. ...read more.


Time influences PES of a good, because the shorter the time period, the more firms are faced with difficulties in controlling the production of a good. Also, availability of producer substitutes affects the PES because if a product has many substitutes, producers can alter their pattern of production regarding price changes. The PED for houses is relatively elastic while the PES for houses is relatively inelastic. The PED for houses is elastic because the size of a household changes. When housing is cheap, households expand. For example, young adults can leave home, roommates can pack fewer to a suite, or homeowners can trade up and get a family room, a media room, a home office, or even another home. Conversely, when housing is costly, households get smaller. For instance, young adults can move back with their parents, starving artists can consume less space, parents, starving artists can consume ...read more.


However, there is a lack of supply. Therefore, the equilibrium price increases from P1 to P2 and the equilibrium quantity demanded would increase from Q1 to Q2. Because these changes are only in the short run, there will eventually be a new equilibrium point after time has passed. Unfortunately, the state of the economy and increasing unemployment rates means that the house prices can fluctuate at any time. If unemployment increases, buyers won't have the income to afford houses resulting in a decrease in prices. Also, if interest rises, the number of buyers will decrease resulting in another decrease in demand. This is because if interest rises, this will result in higher housing prices. Accordingly, demand would decrease due to these higher prices. Population growth has always been recognized as a primary force driving demand. If potential sellers joined the market, the price would decrease and be able to stabilize again as shown in Figure 2 however the quantity demanded will increase. ...read more.

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