European Business Economics - Coursework Example

European Business Economics Table of Contents Demand 3 Supply 4 Reasons for Change in Price of Houses over the Last 3 Years 6 Predictions for the future 9 Monetary Policy and Fiscal Policy 10 Monetary Policy 10 Fiscal Policy 11 References 12 Demand Demand is the desire of a consumer for a product backed with purchasing power. As per the theory of economics, there are mainly two factors of demand namely taste and ability to purchase. Taste denotes the desire for a good. It refers that the consumer is ready to buy goods at a specific price. Ability to buy suggests if the individual can afford to buy a commodity at a specific price, he must hold sufficient income or wealth. Both these factors of demand depend on the price in the market. The demand is low when the market price of the commodity is high; accordingly if price is low, demand is high (Whelan & Msefer, 1996). In Figure 1, the curve shows an isolated relationship between the price and quantity of a commodity that the buyers are eager to purchase in a given time period. This refers to a simple demand curve. Rate of Purchase (WSU Linux Users Group, n.d.). This simple demand curve shows that the price is the only factor that affects demand. Supply The seller’s achievement is determined with his ability and willingness to supply goods. When the price is high more goods are available for the purchasers and this helps in maintaining the profit even if the production cost is high. If there is a short-term increase in supply then the manufacturing cost rises and will primarily increase price. In Figure 2, the supply curve rise in the upward direction and therefore, needs higher price for a better production. (University of Bradford, n.d.) Demand and supply are the fundamental concepts of economics. It is also said to be the backbone of market economy. Reasons for Change in Price of Houses over the Last 3 Years Over the last three years, the UK economy has experienced drastic changes in the prices of house which states that they are 9 % higher than they were three years ago. Again the prices fell during 2008, which reported a massive drop since the start of the year. These changes are due to the factors of recession that emerged during the last few years. The reasons for such change can be attributed to the demand and supply theory which states the relationship between demand and change in prices. Price fall in housing sector The lower prices during 2008 are due to credit crunch that resulted in scarcity in availabilities of mortgages. The buyers could not purchase because they could not borrow money, thus, a fall in demand was seen in the housing sector. In order to boost the market, prices were lowered down to increase demand. According to certain forecasters, they will continue to remain slow because of rising inflation, unemployment and slow pace of growth. Effects of interest rate The interest rates during 2007 affected consumer spending. As in the theories of demand and supply, interest rates play a major part. Thus, the impact of interest rates on the house price will have to be established. As the interest rates rose, the number of mortgage approval also fell due to its effect on the consumer’s capacity to spend. When this ability decreases, the demand also decreases accordingly. House price growth It was also seen that with an increase in interest rates during 2007, a rise in sales of houses was recorded. Due to the rise in inflation, first time buyers of house felt the necessity of fund as they found themselves incapable to afford prices. Thus, with a thrust in the rate hike, the prices of house were also increased to maintain break-even as people were forced to take loan, despite the fact that interest rates were still high. Important Factors Growth of real incomes: As there is a rise in an average standard of living, the demand for housing as well as for luxurious properties increased. As people in UK showed a trend to move to exclusive houses, the demand for housing increases with high prices which increased the growth of incomes of the people who are ready to sell their belongings at a given rate. The people in UK are more concerned about their living standard. They wanted a comfortable and luxurious accommodation and they accept the value offered by the seller once their needs are fulfilled. When the demand for a property increases and if the supply is low, the price automatically rises for the property in that particular area. Consumer confidence: Confidence is very crucial in the housing region. If the economy keeps on growing uniformly and there is a rise in property, the confidence of the home buyers increases. This transfers the stability of authority in the market to the sellers if in case the property supply is short. In the United Kingdom, the number of buyers is increasing for houses and this relates to a major factor for rise in demand giving more margins to the suppliers. Jobs: In areas where the unemployment remains constantly above the national average, the average income becomes low and this affects the confidence of the buyer. Basically the three factors; employment, income and confidence are vital in shaping the track of the house value. As these factors rise, it increases the price. Most of the areas of the UK are suffering from unemployment. Thus, people are not able to pay the price for which they are forced to mortgage their properties resulting in rise in the demand (tutor2u, n.d.). Predictions for the future In the coming years, the demand for houses will increase due to the rise in standard of living as people are more likely to live in comfortable and luxurious accommodations that will increase the price and supply of the house in the UK. But there is a feeling that many peoples are looking towards migrating to overseas due to the political and the economical situations as they have the feeling that there is a better option in other parts of the world (Financial Advice, 2009). As far as the demand and supply of housing is concerned, there will be an increase in demand for houses in the market. Supply basically depends on the sellers’ ability to provide. In the UK, sellers are not able to meet the needs of their buyers due to the lack of desirable properties. In the coming years the price of the houses is definitely going to increase due to more demand in the market for better accommodations but the supply is not seen up to the mark. Hence, there will be a rise in price making a good margin for sellers. Monetary Policy and Fiscal Policy The UK government had to face lot of problems related to the economic challenges that were present in the last three years. The financial recession impacted significantly. The economic factors and the financial recession forced the UK government to change the fiscal policies and monetary policies for the development of the economy. Monetary Policy The economic condition was neither rational nor stable during the last three year period. Inflation rate and unemployment rate were high. The interest rate policy was used as a tool to control the economic situation and stabilize the situation. It was recommended to decrease the interest rate from 5% to 0.5% between October, 2008 and March, 2009 (Sentance, 2010). For the recovery of the economy an agreed amount of £175 Billion was introduced in the financial market of UK. The interest rate was reduced for the growth of the economy. The GDP rate was low but it started to recover in the fourth quarter of 2009. When the economy started to get stabilised, the government started to increase the rate of interest to maintain the growth stability in the economy. For boosting up the economy, UK monetary policy was to introduce more capital and loans in the banking and financial system. Nearly £150 Billion was introduced in the financial sector for increasing the economy activities that lead to growth of the UK economy. Bank of England issued the treasury bills to aid the financial system as the motive was to help out the private borrowers (Economy Watch, 2010). Fiscal Policy In order to respond to the economic situation, the Government of United Kingdom, planed for borrowings to meet the future requirements of the economy. In order to source for current revenue, the government focused upon the taxation system. There were elaborate aims with tax revenues were and it was the main source to meet the current expenditure (Economy Watch, 2010). The policy of the UK government was to decrease the debt level of the country that would help in maintaining the stable growth of the economy. The ratio of the debt and GDP was evaluated and borrowings were made accordingly (Economy Watch, 2010). To meet the expenditures in 2008 and in 2009, the taxation system was provided importance. And for the future years 2010 – 2011 the debt policy was used. Since the inflation was increasing and unemployment loomed large, the UK government had drafted the expenditure policy in the way to minimize the inflation rate (Economy Watch, 2010). In the short run, there were cut off in the tax revenues from all the sources, this forced the government to cut of the expenditure. The problem of unstable economy still existed. To minimize the effect, the UK government went for debt policy by increasing the debt of the economy and also the level of expenditure was increased. The expenditure and the revenue policy were the main tools used by the UK government to stabilize the economic condition and also for the purpose of growth. References Economy Watch, 2010. UK Economy: The Bank of England, UK Monetary and Fiscal Policy. Financial Report. [Online] Available at: http://www.economywatch.com/world_economy/united-kingdom/bank-of-england-monetary-fiscal-policy.html [Accessed November 22, 2010]. Financial Advice 2009. Is the UK economic environment pushing more and more people overseas? UK economy News. . [Online] Available at: http://www.financialadvice.co.uk/news/12/ukeconomy/11822/is-the-uk-economic-environment-pushing-more-and-more-people-overseas.html [Accessed November 22, 2010]. Sir Gieve, J., 2009. Seven lessons from the last three years. .Bank of England [Online] Available at: http://www.bankofengland.co.uk/publications/speeches/2009/speech377.pdf [Accessed November 22, 2010]. Sentence, A., 2010. UK monetary policy – how long should “The song remains the same”? Bank for International Settlements. [Online] Available at: http://www.bis.org/review/r100726f.pdf [Accessed November 22, 2010]. Tutor2u, No Date. Demand and Supply for Housing, Content. [Online] Available at: http://tutor2u.net/economics/content/topics/housing/housing_demand_supply.htm [Accessed November 22, 2010]. University of Bradford, No Date. Supply Curve. Economics and marketing.[Online] Available at:http://www.brad.ac.uk/acad/mancen/lomas/other_pages/economics_and_marketing/supply1.gf [Accessed November 22, 2010]. Whelan, J. & Msefer, K., 1996 Economic Supply & Demand. MIT System Dynamics in Education Project. [Online] Available at: http://sysdyn.clexchange.org/sdep/Roadmaps/RM6/D-4388.pdf [Accessed November 22, 2010]. WSU Linux Users Group, No Date. Demand & Supply Curve. Final Paper [Online] Available at: http://lug.wsu.edu/files/final_paper_html_m33ae3f3f.png [Accessed November 22, 2010]. Read More