Microeconomics Commentary

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. The demand for necessities is relatively inelastic because people are willing to pay whatever price they can get for a good that is a necessity. On the other hand, supply is the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a give time period. The market supply depends on the behavior of all the individuals willing and able to supply a good at some price. Also, the law of supply is the quantity of a good supplied in a given time period increases as its price increases. Different from the determinants of demand, determinants of supply are factor cost, technology, taxes or government regulation, subsidies, and the number of sellers. However, the price elasticity of supply (PES) is the responsiveness of quantity supplied to the changes in the price given. The major determinants that affect PES of a good are time and availability of producer substitutes. 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.

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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 less space, parents can put two children per bed, and people who use extra bedrooms as a study room can move into a smaller apartment and work on the kitchen table. On the other hand, the PES of houses is inelastic. This is because it takes a long time to build houses and because houses are expensive. Also, once built a house can't be easily moved. Mobile homes are an exception to this, although they usually become fixed too.

According to the article, there has been an increase in demand due to better affordability and lower interest rates but there is still a lack of supply. Even though demand has increased, supply has not increased enough to keep prices low. Therefore, as shown in Figure 1, an increase in demand results in a rightward shift in demand. 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.

Microeconomics Commentary

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