Microeconomics and Housing Market Crisis

This microeconomics assignment investigates the Australian housing market crisis. It examines the causes of rising housing prices, focusing on increased demand due to population growth, rising incomes, and cheap loan availability. It analyzes the inelastic supply of land and its contribution to the price surge. The assignment uses a Production Possibilities Frontier (PPF) diagram to illustrate economic growth and its relationship to the housing crisis.

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................6
Answer a......................................................................................................................................6
Answer b......................................................................................................................................7
Answer c......................................................................................................................................8
References........................................................................................................................................9

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Answer 1
Figure 1: Demand of International Student in Charles Darwin University
(Source: as created by author)
Figure 1 depicts the demand-supply scenario for international students in Charles Darwin
University. Initially, the demand for the university’s education service is given as DD. The
supply of education service is given as SS. E indicates equilibrium position of the university
(Bernanke, Antonovics and Frank 2015). There are M number of students enrolled in the
university with a fess of F. Now, when several Australian universities open up campuses in
Asian countries, the students previously coming from Asian countries to study in different
universities of Australia now have opportunity to study in their home country. They no longer
need to come in Australia to get admission in Australian universities. The new campuses in

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Asian countries now attract students in Asian countries. This reduces the demand for
international students in Charles Darwin University. Therefore, the strategy of competing
universities to establish campuses in Asian countries give them an additional competitive edge.
The decline in demand for international students in the university has shown by an inward shift
of the demand curve (Friedman 2017). Accordingly, the demand curve shifts from DD to D1D1.
Accordingly, the decline demand has an impact on equilibrium market of education service. The
new equilibrium is at E1. With a reduced demand for international students, the total pool to
students enrolled in United States now declined from earlier position of M to M1. The decreasing
demand of international student also affects the equilibrium fees, which now reduces to F1.
Answer 2
Figure 2: Effect of increased interest rate
(Source: as created by author)

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The equilibrium position or market outcome depend on the conditions of supply and
demand in the relevant market. Again, supply and demand depends on a number of factors.
Change in any one of the factor causes a change in demand-supply scenarios and corresponding
outcome of the market (Nicholson and Snyder 2014). Suppose, DD represent the demand of
domestic students and SS presents the corresponding supply condition. Equilibrium in the market
for domestic students is settled at E giving outcome as S* number of enrolled students charging a
fee of F*. Education today has become an expensive service. To enroll in any specific course
students have to bear a huge burden of expense. Students often seek for education loan to finance
their education expenditure. Now availability of loans and interest or cost of such loans are
important determinants of demand. When government doubles the interest rate charged on
students then cost of loans increases. This makes education in expensive universities
unaffordable. The students who cannot afford cost of University courses and have to rely on
education loans now are unable to get admission in the university. The increased interest rate
thus reduces demand of domestic students in the university (Rader, 2014). The new demand
condition is represented by the new demand curve D2D2, which lies to the left of old demand
curve DD. Consequently, the market has now shrunk with a less number of students be enrolled.
Answer 3
Economic growth of a nation is defined as a state where average income or output
continued to rise. There are different factors that determines growth of a nation. Most of these
determinants are inter-related with each other. The first primary determinant of growth is a rise
in the real GDP of a nation. Broadly, there are six main determinants of economic growth. Of the
six, four are related to supply side and two are related with efficiency and demand. Supply side
factors include natural and human resources, capital goods and available technology. With

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discovery of more and more natural resources and access to those resources brings economic
growth. Improvement in human resources with development of new skills raises productivity.
Efficient technology makes a better use of economic resources and increases productivity with
given resources (Keohane and Olmstead 2016). Expansion of demand for goods and services
encourages increased production and growth. Efficiency refers to both allocative and productive
efficiency.
The concept of economic growth is closely related with Production Possibility Frontier.
Economic growth is measured is terms of increased output. Production Possibility Curve shows
all feasible combination of inputs to achieve a certain level of output. Given the PPF, increased
production of one good require sacrifice in the unit production of some other good. In order to
achieve an increased quantity of both goods PPF should be shift outward ((Stiglitz and
Greenwald 2014). Different growth determining factors like an increase in natural resources,
improvement in technology, increase efficiency all causes an outward shift of PPF and hence
reflects economic growth.

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Figure 3: Economic growth and PPF
(Source: as crated by Author)
Answer 4
Answer a
In the last few years, Australia is facing crisis in the housing market. The housing prices
in Australia is growing rapidly. The rising price of houses in Australia mainly resulted from
increasing pressure on housing demand. Factors resulted in a high housing demand are the
following
 Rapid growth of population is one primary factor creating massive demand of housing. In
metropolitan cities like Darwin, Sydney and Melbourne have experienced a growing
housing demand generated from both domestic population and immigrants.

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 The second determinant factor of housing demand is the income of the average
household. With increase in economic activities in the metropolitan cities, the average
income rises and people found housing market as an important field of investment
(Rossini and Kupke 2015)
 Availability of loans at a cheap rat is another factor that boosts housing demand.
However, supply of housing in relatively inelastic due to limited supply of land. The
combination of high demand and low supply results in high prices of housing.
Answer b
Figure 4: Increased demand and housing prices
(Source: as created by Author)

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An increase in housing demand from DD to D1D1 given the supply increases housing
price from P to P1 and equilibrium number of houses from Q to Q1.
Answer c
Land is a natural resource. The supply of land is limited for any nation or region by the
size of geographic area. In this sense, the supply of land is perfectly inelastic, as it cannot be
changed in response to a high or low price. However, land can be subdivided and used for
building new houses. Hence, the supply of new houses is not perfectly inelastic rather it is
relatively inelastic. This is the case happening in Sydney and Melbourne (smh.com.au 2016).

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References
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.
Irvine, J. (2016). Does Australia really have a housing shortage?. [online] The Sydney Morning
Herald. Available at: http://www.smh.com.au/money/does-australia-really-have-a-housing-
shortage-20160403-gnxgz2.html [Accessed 10 Jan. 2018].
Keohane, N.O. and Olmstead, S.M., 2016. Introduction. In Markets and the Environment (pp. 1-
10). Island Press, Washington, DC.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Rossini, P. and Kupke, V., 2015. The socio spatial substructure of the Australian city: how well
does it explain house price?. International journal of housing markets and analysis, 8(1), pp.53-
72.
Stiglitz, J.E. and Greenwald, B.C., 2014. Creating a learning society: A new approach to
growth, development, and social progress. Columbia University Press.