Economics for Business

Economics for Business

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Equilibrium............................................................................................................................3
Changes in demand................................................................................................................6
Factors influencing changes in demand for commercial property.........................................6
Changes in supply..................................................................................................................9
Factors influencing changes in supply for commercial property...........................................9
Elasticity of demand and supply..........................................................................................10
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14

INTRODUCTION
Business economics is the field that studies the financial and organizational and
environmental issues which are being faced by the corporations. It studies about the various
factors having an impact over the business strategy and expansion plans. It is used for
determining the future course of actions that can be taken for achieving the success. This
report provides a detailed analysis of the factors affecting demand and supply of the
commercial property in UK over the past 10 years. It also describes about the various
important concepts of economics such as equilibrium, impact of change in price over the
movement of demand curve and supply curve and the price elasticity of demand and supply
with respect to the commercial property.
MAIN BODY
Equilibrium
Equilibrium is the price that equates the demand and supply in a particular market. It
is a state of no change. Under this, the quantity demanded of the goods is equivalent to the
quantity supplied and bot demand and supply works in a harmony (Equilibrium. 2020). The
market equilibrium demonstrates three types of characteristics which are behaviour of agents
in consistent, thee is not incentive in respect to change in the behaviour and the dynamic
process governs the market or equilibrium outcome. The free market trend towards the point
of equilibrium.
Impact of increase in demand on the market equilibrium

In case of increase in income, there will be shift in the demand of the product which
will consequently lead to shift in the demand curve towards the right (Movements and shifts
in demand and supply curves. 2020). This will raise the equilibrium price and quantity
demanded while the supply curve will remain the same.
The graph above shows, initially demand and supply of the product is at DoDo and
SS. With the increase in the income level, the demand curve shifts to the right to the new
position of D1D1 with the excess demand of the product to E0A. this excess demand exerts
pressure on the price. This leads to rise in price to OP1 where again demand equals to supply
and a new equilibrium point is attained.
Impact of Decrease in Demand on Market Equilibrium
The decrease in the demand curve leads to entire shift in the demand curve to the left.
As presented below, the initially demand was at D0D0 which intersects with SS at point E0. For
example, the decrease in income level of the consumers will lead to decrease in the demand
of the product or services which shifts the demand curve towards left at D2D2, the new
equilibrium point is attained at price P and quantity Q with the surplus E0B of the quantity
supplied which exerts downward pressure in price.

Impact of increase in Supply on Market Equilibrium
The below graph shows increase in the supply of the product because of lower input
prices. This causes rightwards shift in the demand curve from SS to S1S1 which intersects at
the demand curve at point E1 which leads to new equilibrium point at price OP1 and larger
quantity OQ1. Thus, casing fall in price and increase in the quantity.
Impact of decrease in Supply on Market Equilibrium

The above graph depicts, decrease in the supply of the goods which may be because
of technological problems or higher input cost. This has led to leftwards shift from point SS
to S2S2, this has resulted into increase in price and decrease in the quantity. The variation in
the price influences the quantity demanded of the good but it will move on the same demand
curve. The movement can be upward or downward.
Changes in demand
The change in demand is caused by the change in the price if the product which can
be increase or decrease while other factors being remained constant. This change causes
movement in the demand curve.
The above graph indicates that the price of the product at the price level of OP, the
demand of the good is at OM level based on the assumption that the other factors will remain
unchanged. As the price of the product increases to OP”, the demand of the product reduces
to point O and the demand curve moves upward. In contrast to it, when the price of the
product decreases to point OP’, then the demand of the quantity of the product increases to

ON which makes the demand curve move to downward direction. Therefore, the increase or
decrease in the price level leads to movement in the demand curve.
Factors influencing changes in demand for commercial property
There are various factors having an impact over the demand of the commercial
property which also leads to determining the price of the commercial property. Some of the
important factors are stated below.
Population growth
The population of England is estimated to grow over 60 million in 2041 which is an
increase of 6 million. It is not just a number but represents the demographic changes. The rise
in working population is the major factor for determining the demand of the commercial
property and its purchase. It is also estimated that the increase in population is because of the
rise in birth then it will have a less short term effect but more long term effect. Also, the
reason for increase in population is because of migration or employment then it will have
huge impact over the demand.
(Source: https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and-
demand-of-housing/)
Interest rates and mortgage availability
The interest rates have a huge impact over the demand of commercial property in UK
as it affects the cost of monthly payments. In times of high interest rates, the cost of monthly

payment of mortgage will also increase which will lead to lowering the demand of the
property for buying or renting. The money borrowed for buying the property becomes more
expensive which will naturally dampens buying sentiments.
(Source: https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and-
demand-of-housing/)
The majority in the UK prefers to take mortgage rates, thus, it any change in the rate
will directly affect the interest payment for mortgage amount. For instance, if the mortgage of
£150,000 mortgage a 0.5% change in base rates will vary the monthly payments by about £60
a month. Therefore, a small change can affect the buying behaviour of the people.
Economy
The demand for the property for business purpose is also affected by the economic
situation of the country (Factors affecting supply and demand of housing. 2019). Demand is
basically dependent upon the income. The higher the economic growth of the country higher
will be the income of the people which will consequently lead to the increase in the demand
and increase in the price of the property. A robust and growing economy with lower
unemployment rate and strong wage inflation will contribute towards the positive market
sentiments which will result into increasing the price. The rising income enable the people to
take huge mortgages which results into encouraging the demand for housing. In boom times,

the demand for such properties increases and grows fast which suggests that the demand is
income elastic.
Location
The property which is located to the excellent location with respect to view, transport
facility, market etc. tends to have higher prices. The majority of the people are interested in
living in the location which is close to their place of work and having easy access to the daily
amenities like retail stores, leisure etc. These factors naturally create the demand of the
property which consequently leads to increase in the price of property in such location.
Changes in supply
It refers to the impact of change in the price of the goods on the quantity supplied of
the same. This movement represents variation in the quantity supplied of the product with
respect to the change in its price. The movement can be of two types, which are, extension
and contraction (Karl and et.al, 2019). The extension is caused because of rise in the price of
the product, on the other hand, contraction, is caused because of fall in the price. In case the
price increases, there will be increase in the quantity supplied which leads to upward
movement of the supply curve while in case of decrease in the price, the supplier will tend to
decrease the quantity supplied which consequently leads to downward movement along the
supply curve.
It can be seen in the graph, as the price increased from 15 to 20, the quantity supplied
increases from 10 to 30 and visa versa.
Factors influencing changes in supply for commercial property
Just like factor affecting the demand, there are factors affecting the supply of the
commercial property in UK. A detailed description is given below.

Building new commercial properties
The below graph shows the number of new properties being built. The increase in the
orders in the year 2017 has been driven by the growth in the infrastructure new orders in the
quarter 3 of 2017 (Construction statistics, Great Britain: 2018. 2018). The value of all these
new building orders has exceeded its pre-downturn in the year 2006 which has reached to
£20,998 million in the year 2017. This has led to the rise in the value of the commercial
properties which is more than the 13.6% fall in the public sector housing in 2017.
The value of construction new orders by sector, 2007 to 2017
(Source: https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/articles/
constructionstatistics/number192018edition)
Availability of the substitute goods
There are situations when other substitutes are being available to meet the changing
requirements of the business. It is sometimes feasible for the people to take the property on
rent instead of purchasing which is because of the cost benefit arising from it. The availability
of the substitute products at the lower price will lead to the shift in the supply curve towards
right as it will cause increase in the supply of the product which will further result into
increase in the price of the product.

Elasticity of demand and supply
Elasticity: It is an economics term which is used to describe the change in the buying
the behaviour of the consumers and the selling behaviour of the suppliers with respect to
change in the price. The elasticity of the good or service differs with the number of
substitutes available, relative cost and also the volume of time elapsed after the price change
occurred.
In the market, the quantity of goods and services supplied and demanded are
sometimes very slow to react with respect to the change in the price in the short run but they
substantially reacts more in the long run (Guirguis, 2019). Consequently, the demand and
supply most often relatively inelastic in the short run and elastic in the long run.
The elasticity is lower in the short run as compared to the long run. Changes that are
aren’t possible to be made in short time frame is made realistic over the longer time frame.
On the demand side, it means the consumer makes the lifestyle choices such as buying more
fuel efficient vehicle that will reduce the fuel usage. While on the supply side, it refers to the
producers to produce things such as new factories, constructing new building and so forth.
Price elasticity of demand (PED)
The price elasticity of demand (PED) measures the quantity demanded in respond to
the change in the price of the product or services. It is determined as follows:
PED = % change in quantity demanded / % change in price
This could range from 0 to infinity. The price elasticity of demand is said to be
inelastic when it is less than 1, that is, the change in the price has very less impact over the
quantity demanded (Rao, 2018). On the other hand, it is considered to be elastic when PED is

more than one which implies that the effect of price change is more on the quantity demanded
of the good.
In short run, the quantity demanded of the commercial property is falls slightly from
point Qe to Q1 as the price increases to P1 from Pe. However, with more time the demand
curve becomes more elastic and the fall in the quantity demanded falls by the greater amount.
This can be seen in the below graph. In another lapse of period, the quantity demanded
further decreases to Q3 at the same price of P1 in the long run. Thus, in the commercial
property, the demand of the property decreases with the increase in the price of the property
and the impact of which can be majorly seen in the long run as compared to the shot run.
Price elasticity of supply (PES)
The price elasticity of supply (PES) refers to the measure of the how much quantity is
being supplied by the supplier with respect to the change in the price of the product. It is
determined using the below formula:
PES = % change in quantity supplied / % change in price
The price elasticity of supply is mainly larger in the long run as compared to short
run. Over the short run, the it is impossible for the firms to change the size of their production
system in respect to increase or decrease the quantity of the good, so the quantity supplied is
not much responsive to change in the price of the product (Choudhry, 2020). But in long run,

the firms can establish or build new buildings or factories which leads to the increase in the
responsiveness of supply with variation in price.
In short run, there is slight shift in the supply curve from S1 to S2 as the price
increases from Pe to P1 which lead to increase in the quantity supplied. As the time passes,
the supply curve rotates or expands to point S2 along with the rise in the quantity supplied to
Q2 from Q1 in the long run. Thus, the short run, just like price elasticity of demand, as the
price of the property increases, the supply of the same also increases but at the slow pace as it
takes time to build new structures or buildings which leads to inelasticity of supply but in the
long run, it will become elastic as the quantity supplied increases at the same price.
CONCLUSION
It can be summarised from the above that demand and supply plays a huge role in
determining the price and quantity of the goods and services in the market. There are
numerous factors which leads to determining the prices of the commercial property in UK
such as interest rate and mortgage rate, population, economic growth and so forth while in
case of supply close substitute goods available and building new commercial properties.
Apart from the relevance of elasticity in respect to both demand and supply in long run and
short run. Therefore, it highlights the variating the change in demand and supply on account
of change in the price. Along with that the crucial concepts of economic were analysed such
as equilibrium and impact of change in demand and supply over it. It also studied how the
demand and supply changes with change in price and the movement on the demand and

supply curve. Thus, all these together makes economic meaningful and useful for the
business perspective.

REFERENCES
Books and journals
Choudhry, T., 2020. Economic policy uncertainty and house prices: evidence from
geographical regions of England and Wales. Real Estate Economics. 48(2). pp.504-
529.
Guirguis, M., 2019. Price Elasticity of Demand and Supply, Income Elasticity, Direct and
Indirect Taxation, and Economic Fairness. Income Elasticity, Direct and Indirect
Taxation, and Economic Fairness (March 13, 2019).
Karl, E. and et.al, 2019. PRINCIPLES OF MICROECONOMICS. PEARSON.
Rao, P., 2018. Insurmountable Business Problems and Optimal Managerial Decisions:
Significance of Elasticity of Demand. International Journal of Advances in
Agriculture Sciences.
Online
Construction statistics, Great Britain: 2018. 2018. [Online]. Available Through:<
https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/articles/
constructionstatistics/2018>.
Equilibrium. 2020. [Online]. Available Through:<
https://www.economicsonline.co.uk/Definitions/Equilibrium.html>.
Factors affecting supply and demand of housing. 2019. [Online]. Available Through:<
https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and-
demand-of-housing/>.
Movements and shifts in demand and supply curves. 2020. [Online]. Available Through:<
https://www.economicsonline.co.uk/Definitions/Movements_and_shifts.html>.