Assignment on Economic Principles And Decision Making

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING
Economic Principles and Decision Making
Name of the Student
Name of the University
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ECONOMIC PRINCIPLES AND DECISION MAKING1
Table of Contents
Introduction......................................................................................................................................2
Economic issue of housing affordability.........................................................................................2
Analysis of house price movement in Australia..............................................................................5
Reason for increase in housing demand in Australia.......................................................................6
Reasons for supply shortage............................................................................................................9
Concept of price elasticity of demand and supply.........................................................................10
Housing price analysis...................................................................................................................11
Conclusion.....................................................................................................................................12
Reference list.................................................................................................................................13

ECONOMIC PRINCIPLES AND DECISION MAKING2
Introduction
Objective of the paper is to make microeconomic analysis on one of the economic issues
of Australia. Microeconomic analysis refers to the analysis of a single market using concepts of
demand, supply, price elasticity and others. Demand and supply are the two of primary aspects
describing market mechanism. Demand and supply works independently and determines market
equilibrium corresponding to which price and quantity are determined. Changes in state of
demand and supply lead to a change in position of equilibrium in the market causing market
price and equilibrium quantity to change (Perea, 2017). Affordability of houses is one of the
major problems for Australian economy. Housing price in Australia has steeply increased
making house unaffordable for most people. Increase in house prices is faster in the capital cities
of Australia. Prices have been increased at a greater magnitude than income resulting in an
increase in price to income ratio. The problem of housing affordability due to steep rise in house
prices has been examined in light of housing demand, housing supply and elasticity of demand
and supply. Increase in price of a good is triggered by existence of a shortage in the market.
Higher demand of houses and lack of supply of houses causes shortage of houses (Gurran &
Phibbs, 2016). There are different factors that cause housing demand to increase. Supply of
houses however has not increased at the same pace as demand. The paper investigates different
demand and supply side factors. The responsiveness of demand and supply determines elasticity
in the market. These issues have been discussed in the report using relevant concepts of market.
Economic issue of housing affordability
In Australia, one of the growing problem is increase in homelessness heading the
economy towards a national housing crisis. One significant factor contributing to a nationwide
housing problem is the negative gearing that have encouraged people belonging to middle and

ECONOMIC PRINCIPLES AND DECISION MAKING3
higher income groups to buy properties. With this demand side pressure house prices in Australia
are on steady surge. Undoubtedly properties in Australia are the most expensive ones in the
world. The five biggest cities in Australia are suffering from severe housing affordability
problem (Killeen, 2019). Sydney, one of the capital cities of Australia was ranked as the second
worst cities in terms of housing price affordability where prices are nearly 13 times more than
median income of household. In Melbourne, house prices are nearly 10 time higher compared the
median income. In other capital cities such as Adelaide, Perth and Brisbane prices were nearly
six times above the median income.
Figure 1: Nominal house prices in Australia
(Source: oecd.org, 2020)