The Law of Supply and Demand Questionnaire

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Question 1. a. Draw the total supply and demand curves for apartments in this city, and show the equilibrium and quantity traded. Equilibrium = 430 x 130 Quantity traded = 560 apartments at £130 000. b. Calculate the price elasticity of demand for apartments at the equilibrium price. PED = 7.5% (Change in quantity demanded) / 8.3% (Change in price) = 0.8. c. Outline the factors that are likely to determine the price elasticity of demand for apartments in practice. 1. The percentage of income that is spent on a good plays a large role in determining price elasticity. The higher the portion of income spent the higher the elasticity. 2. Real income plays a role, especially in the long run, as living standards improve, so does one’s earnings, thus allowing them to spend more on housing. 3. Confidence in the market. As housing is seen as an investment, not just as a necessity, people are looking at the market and questioning it’s stability. The more confident they are that the market is stable, possibly on the rise, the more they are willing to spend with regards to percentage of income. 4. The necessity and nature of the good also determines the price elasticity. In the case of housing, this is a necessary good, thus the lower the elasticity. 5. The substitute effect in this case would be renting, however, in large cities, the rentals for apartments are quite high, so the substitution effect would be quite low, thus the demand would tend to be more inelastic. 6.
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