An Examination of Supply and Demand Factors in Real Estate Markets

This assignment delves into the principles of supply and demand within real estate markets, examining factors that influence property prices and market equilibrium. It begins by comparing supply constraints in different cities, highlighting how limited supply can lead to price increases when demand rises. The assignment identifies key determinants of both supply and demand, such as population size, real income, and housing stock. It further explores how shifts in supply and demand curves impact property prices, using examples like increased construction costs and changes in household demographics. The assignment includes a quantitative analysis, calculating equilibrium price and quantity, and assessing the impact of price changes on demand, along with calculating price elasticity of demand, demonstrating the inverse relationship between price and quantity demanded. The findings are supported by relevant academic references, providing a comprehensive overview of supply and demand dynamics in the real estate sector. Desklib provides a platform for students to access similar solved assignments and study resources.

SUPPLY AND DEMAND
FOR REAL ESTATE
MARKETS

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
1.1................................................................................................................................................3
1.2................................................................................................................................................3
QUESTION 2...................................................................................................................................3
2.1................................................................................................................................................3
2.2................................................................................................................................................3
2.3................................................................................................................................................4
QUESTION 3...................................................................................................................................5
3.1................................................................................................................................................5
3.2................................................................................................................................................5
3.3................................................................................................................................................6
REFERENCES................................................................................................................................7

QUESTION 1
1.1
From the figure given for both cities, it has been identified that City A has more constrained
supply than City B as evidence from the diagram which depicts that increase in demand would
cause prices to be risen rather than increase in output or employment.
1.2
Constrained supply implies that with the increase in demand, there would be rise in prices of the
property or housing stock in the area or city where supply constraints are imposed from physical
and regulatory perspectives (Valentinov and Thompson, 2019). The reason behind increasing
prices in the condition of constraint supply is to cope with the increased demand. When demand
rises, the prices of property are raised rather than output or employment to increase supply. Such
a condition depicts that when there are regulatory or physical constraints present, then the supply
can't be raised more and accordingly, trade off between supply and demand is done through
raising prices.
The concept can also be explained through supply elasticity, where it can be said that when the
other factors are regulating the supply, then the price elasticity of supply is low indicating
constrained supply and rising prices conditions.
QUESTION 2
2.1
2.1.1 Option D (a and b) population size and real income are determinants of demand.
2.1.2 Option C - Housing stock is the determinant of supply.
2.2
2.2.1 The reason behind fall in prices of property due to increase in supply is that when supply
rises without the change in demand, then this leads to oversupply of property or houses in the
market (Laibman, 2019). Accordingly, there exists competition among the sellers or suppliers
where they aim to sell more and more property at a competitive prices and results in reduction of
prices to generate more sales of property. This situation can be seen in figure 4 where at constant
demand the increase in supply depicted from shift in supply curve indicates the reduction in
prices of property below the first equilibrium point.

2.2.2 According to the theory of demand and supply, when the factor other than the price
changes it leads to shift in demand curve where supply remains constant. This can be seen in
figure 3 where a shift in the demand curve has been taken place at a constant supply, which leads
to rise in prices of property (SHASTITKO, MELESHKINA and Dozmarov, 2019). The reason
behind such an increase in prices is due to higher demand for house property as a result of rise in
real incomes of the people. When real income rises, this makes them capable to own houses and
properties and accordingly, they demand more property. Accordingly, competition among the
buyers to buy more property results in increased prices of property above the equilibrium level.
2.3
Determinant Determinant of supply
or demand
(demand/supply)
Shift in the curve
(right/left)
Effect on price
(increase/decrease)
e.g. Increase in interest
rates
e.g. Demand e.g. Left e.g. Decrease
Increase in single-
person households
This is a determinant
of demand where
increase in single-
person households
leads to increase in
demand for houses
where size of
population remains the
same (Becker,
Michael and Michael,
2017).
The demand curve will
shift to rightwards at a
higher demand for
houses.
The property price will
increase as the supply
remains constant and
demand rises will lead
to competition among
the buyers and results
in increased prices.
Increase in
construction costs
It is a determinant of
supply where higher
construction cost
indicates higher cost
of production and the
The supply curve
would shift inward or
to the left as less
supply would be
initiated by the
The property price will
increase as the
increase in the cost of
production would
necessarily be

supplier will tend to
supply less at different
quantity level.
supplier at higher costs
(Sepulveda, 2020).
recovered by the
supplier from the
customers and leads to
increased prices of
property.
QUESTION 3
Qd = -8Pd + 20
Qs = 9Ps – 8
3.1
Qd = Qs
So, -8P + 20 = 9P – 8
-8P – 9P = -8 – 20
-17P = -28
P = 28 / 17 = 1.65
Therefore, the equilibrium price in the given case is 1.65.
To find out the value of equilibrium quantity, the determined equilibrium price can be substituted
in any one of the above equation. Such as follows:
Here, equilibrium price would be substituted in equation 1,
Qd = -8 * 1.65 + 20
Qd = -13.2 + 20
Qd = 6.8
Therefore, equilibrium quantity demanded and supplied would be 6.8 as at equilibrium point
both quantity demanded and supplied are equal.
3.2
When there is a 10% increase in price, then the price that is 1.65 will be increased to (1.65 *
110% = 1.82) 1.82.

Accordingly, the new and increased price that is 1.82, will be substituted in the first equation to
determine the new quantity demanded and then change in quantity demanded will be found out.
Qd = -8 * 1.82 + 20
Qd = -14.56 + 20
Qd = 5.44
Change in quantity demanded = New quantity demanded – Old quantity demand
= 5.44 – 6.8 = -1.36
From the results so obtained, it has been determined that as a general theory of demand and
supply says when the price rises, there will be a fall in quantity demanded. So, it has been proved
from the above calculations that with the increase in prices by 10%, there is a fall in quantity
demanded by 1.36 and new equilibrium quantity was determined as 5.44.
3.3
Price elasticity of demand can be calculated with the following formula:
Ped = % change in quantity demanded / % change in price
% change in quantity demanded = change in quantity demanded / original quantity demanded *
100
= -1.36 / 6.8 * 100 = -20%
% change in price = 10%
Ped = -20% / 10% = -2
Negative Ped implied inverse relationship between price and quantity. Also, less than -1 indicates
highly elastic demand.

REFERENCES
Books and Journals
Becker, G. S., Michael, G. and Michael, R. T., 2017. Economic theory. Routledge.
Laibman, D., 2019. Is There a Classical Theory of Supply and Demand?. In Growth,
Distribution, and Effective Demand (pp. 279-292). Routledge.
Sepulveda, C. F., 2020. Explaining the demand and supply model with the cost-benefit
rule. International Review of Economics Education, 35, p.100194.
SHASTITKO, A. E., MELESHKINA, A. I. and Dozmarov, K. V., 2019. Error risks under
antitrust law enforcement: Effects of demand and supply shocks. Upravlenets, 10(3), pp.2-
3.
Valentinov, V. and Thompson, S., 2019. The supply and demand of social systems: towards a
systems theory of the firm. Kybernetes.