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Construction Economics. This essay will outline the key factors of supply and demand in the market for new owner occupied housing in the UK and how this forms a market price and quantity sold. It will also analyse how changes in average income, costs of

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Introduction

Construction Economics SUMMARY The economics of supply and demand in the UK new housing market are summed up by saying that they consist of many factors, all of which have to consider before an analysis can be made. They each have their own strengths and weaknesses and all have to consider on their merits before a decision can be justified. Many of the factors concerned are what we come across in our working day lives. Supply and demand is about price the consumer wants to pay for it as well as what the producer wants the consumer to pay. It also shows how the producer will use manipulation on the consumer to try and entice them, even when they may never have considered a purchase. CONTENTS SUMMARY 2 INTRODUCTION 5 MAIN FACTORS OF SUPPLY AND DEMAND IN THE HOUSING MARKET 6 IMPACTS OF CHANGE IN LEVELS OF INCOME 14 IMPACTS OF CHANGE IN COSTS OF RENTING 15 IMPACTS OF CHANGE IN COSTS OF LABOUR 16 ANALYSIS OF ELASTICITY OF DEMAND 17 APPENDICES 18 DIAGRAMS 1.0 How supply and demand effects price 6 1.1 Division in property prices in UK 7 1.2 Graph of divisions in north and south of UK 8 1.3 Effects of costs 9 1.4 Effects of increase in demand 9 1.5 UK supply of credit for homes graph 10 1.6 UK interest rates graph 11 1.7 Supply and demand graph 10 1.8 Determinants of supply 11 1.9 Effects of Increase of demand and price with low interest rates 12 2.0 Higher inflation graph 13 2.1 Gradual recovery in the market graph 13 2.2 Sustained economic graph 14 TABLE OF CONTENTS 1.0 Effect on demand for houses 12 2.0 Impacts of income change 14 3.0 Impacts of costs in renting 15 4.0 Impacts ...read more.

Middle

So looking at those statistics we can assume that personal choice and social trends have a say in supply and demand of new build housing. Average house prices within the UK have increased by 273% since 1959 equating to an average annual rate of 2.7%, where the average rate for income earnings was 2%. The biggest rise in house prices were in the 2000s where they increased by 62% previously beating the 1980s with 61%. The 1990s were the worst on record where they fell by 22%. Key determinant for demand of housing is low interest rates if they are high then this will suppress the demand. The other is income that is being earned. If income rises then more equity becomes available. Diagram 1.3 Diagram 1.4 Increase in costs Diagram 1.3 shows the effects of an increase in costs in the short-run. If construction costs increase CCo to CC1 developers will find construction less profitable and will be more selective in their ventures. In addition some developers may decide not to proceed. The quantity of housing starts will decrease HSo to HS1. This will eventually reduce the level of supply from SHo to SH1 as the existing stock of housing depreciates. Prices will tend to rise from Ro to R1. Diagram 1.4 on the right illustrates the effects of an increase on demand in the short run. If there is an increase in demand for housing, such as the shift from Do to D1 there will be either a price or quantity adjustment, or both. For the price to stay the same, the supply of housing must increase. That is, supply SHo must increase by HS. ...read more.

Conclusion

Analysis of Elasticity of Demand Where do you start and how do you know when it is elasticity of demand. This is essential for anyone who is in the business of selling goods, whether it is a confectioner selling chocolate bars or a building contractor selling houses. We will be looking at the latter as Housing is a larger commodity and more equity can be gained or even lost if figures are calculated wrongly. Firstly what is elasticity of demand; it is when quantity demanded increases by a greater percentage than the price. % ? Qd / % ? P So if quantity was originally ten and original price was four pounds, what happens if quantity increases by 10 percent and price increases by five percent. 10 + 10% = 11 �4 + 5% = �4.20 10/4 = 2.50 11/4.2 = 2.619 As you see from the sum above it has increased from 2.50 to 2.619 this is known as elasticity of demand. So if a local builder was seeking to maximise his revenue from a site he was planning to build on he would have to increase the quantity of housing he had originally planned and for the prices of the properties to increase in price also. If he had originally planned to build four houses with a price of �150,000 he would have to build one more house which would make the total of five houses making an increase of + 25% in quantity of original amount. If the price also increased by + 10% then the new price would be �165000. To work out if this elasticity of demand we have to follow the formula already used. Qty of houses =4/ Price = 1.5 = 2.66 4 houses + 25% = 5 houses / Price = 150000 + 10% = 165000 =1.65 = 3.030 = + 0.3703 = elasticity of demand. ...read more.

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