Business Economics Report: Market Structures and Demand Analysis

This report analyzes the application of business economics principles within the construction industry. Part B examines the impact of rising labor costs on production costs, leading to a decrease in supply and subsequent price increases. Part C investigates the effect of the First Home Buyers grant and its removal on housing demand, illustrating how government policies can create external shocks that influence market equilibrium. The report uses supply and demand models to explain these effects. Part C also analyzes the market structure of the construction industry, concluding that it operates under monopolistic competition, where firms differentiate their products to gain a competitive edge. The report references several academic sources to support its analysis.

Running Head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Course ID

1BUSINESS ECONOMICS
Table of Contents
Part B...............................................................................................................................................2
Part C...............................................................................................................................................3
Part C...............................................................................................................................................4
Reference list...................................................................................................................................6

2BUSINESS ECONOMICS
Part B
Labor is an important input in the construction industry. An increase in labor cost leads to
a significant increase in cost of production. Construction companies now face a higher cost for
every unit of production. The higher input cost results in a decrease in supply. As the supply
decreases, given the demand there arises a shortage in the market (Baumol and Blinder 2015).
The shortage leads to an increase in equilibrium price while a decrease is available number of
buildings. This is explained in the figure below.
Figure 1: Effect of an increase in labor cost
(Source: as created by Author)
The simple demand supply model is used to explain the effect of rising labor cost in the
construction industry. The demand and supply condition in the market is represented by the
curve DD and SS respectively. At the existing demand and supply equilibrium occurs at the
point E. The demand and supply matches at this point results in an equilibrium price of P* and
equilibrium number of building is B*. Now, an increase in labor cost interrupts construction by
raising cost of production (McKenzie and Lee 2016). As a result, the supply curve shifts to the

3BUSINESS ECONOMICS
left. The new supply curve is S1S1. Given the demand curve, the decline in supply shifts the
equilibrium from E to E1. The shortage of production raises the price from P* to P1. The number
of building in response to the increase in labor cost declines from B* to B1.
Part C
The First Home Buyers grant was introduced to raise affordability of housing. The
scheme offers assistance to people who initiate to buy their first home. This scheme thus
increases housing demand. Now, as government announces to scrap the grant, construction
industry faces an external shock to housing demand (Cowen and Tabarrok 2015). Many people
who are thinking of purchasing new home preponed their purchase to take advantage of the
grant. This results in an increase in demand of housing. The construction company or industry
faces an excess demand. The increase in housing demand creates an upward pressure on
equilibrium price and quantity. The can be explained with help of the figure given below.
Figure 2: Effect of scraping first home buyers grant

4BUSINESS ECONOMICS
(Source: as created by Author)
The construction demand and supply condition is represented by the curve D1D1 and SS
respectively. Consequently, the equilibrium price in the market is P1 and corresponding
equilibrium quantity is B1. When government announces that it will scrap first home buyers grant
then there will be an increase in demand for housing. An increase in demand for housing shifts
the demand curve of the construction company or industry outward (Elsner, Heinrich and
Schwardt 2014). This can be observed from a shift in the demand curve from D1D1 to D2D2. With
a change in demand scenario equilibrium in the market shifts downward to E2. The demand now
exceeds housing supply. In the presence of excess demand in the market leads to an expansion in
both equilibrium price and quantity. The equilibrium price increases to P2 while the equilibrium
number of buildings increases to B2.
Part C
The construction firm faces a monopolistically competitive market structure. A
monopolistically competitive market is one where a number of firms competing in the market by
selling a differentiated product. As mentioned above the company named McMansion Pty Ltd
compete in the market with a number of other existing firms (Maurice and Thomas 2015). The
construction industry was made up of small number of firms. Based upon the tradition approach
of market classification of number of buyers and sellers, entry barriers and market power it is
predominantly a competitive market. However, as each firm is unique in its own way the market
structure has become monopolistically competitive instead of being purely competitive. The
monopolistic competition lies between two extreme form of market structure – monopoly and
perfect competition. The small to medium sized firms in the industry tries to differentiate its
product as much as possible. The firms differentiate its product to make its demand curve

5BUSINESS ECONOMICS
relatively inelastic as compared to its competitors. For this, the construction firms specialize in
some areas and engage in product differentiation (Mochrie 2015). They focus on developing
exclusive relationship with their clients. Given these characteristics, the construction industry
can be identified as a monopolistically competitive market.

6BUSINESS ECONOMICS
Reference list
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.
Elsner, W., Heinrich, T. and Schwardt, H., 2014. The microeconomics of complex economies:
Evolutionary, institutional, neoclassical, and complexity perspectives. Academic Press.
Maurice, S.C. and Thomas, C., 2015. Managerial Economics. McGraw-Hill Higher Education.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs: The economic way of thinking
for managers. Cambridge University Press.
Mochrie, R., 2015. Intermediate microeconomics. Palgrave Macmillan.