The Demand and the Prices of Housing in Scotland - Essay Example

Demand and Supply Introduction The main theme of the article is the demand and the prices of housing in Scotland. The article mentions the fact that the number of properties that are available for sale is lower than the demand for housing among the people of Scotland. The demand for housing is not equal to the supply and hence the prices of housing in the country have skyrocketed. Experts are of the opinion that in order to bring sustainability in the market it is important for the builders to build quality homes so that the demand is adequately met by the builders. The lack of supply is because of the fact that there is lack of new houses in Scotland that would be ready for sale and hence the prices of the existing properties are going up. Along with the demand in the housing properties, the demand for housing rental is also increasing simultaneously. The essay looks into the different aspects of demand and supply of housing and how the prices change in responses to the changes in the demand for properties for residence. The first part of the essay makes a general discussion of the theories underlying the demand and supply for a commodity. The later part looks at the various aspects of the theories applied to this article under consideration. Relevant figures have been provided to support the essay. General Discussion on demand and supply Law of demand The quantity demanded is the amount of product that the consumers are willing to pay at the market determined price. The law of demand states that as the price of the products increase the demand for the products decreases and when the price of the product decreases the quantity demanded of the product increase, other things remaining constant (Samuelson and ‎ Nordhaus, 2010). This inverse relation between the price and the quantity demanded is shown with the help of the figure below. In the figure it can be seen that when the price of the product is P2 the quantity demanded is Q2. When the price of the product increases to P1 the quantity demanded reduces to Q1. On the other hand when the price decreases to P3 the quantity demanded increases to P3. This proves the inverse relationship. Factors that change demand There are several factors that may affect the demand for the product. First of all, the changes in the price of the products may affect the demand for the product as demonstrated in the figure above. This would be a movement along the demand Secondly, if the income of the individuals increase there would be a shift of the demand curve outwards in the price quantity space. This means that the as the income of the individuals increase the quantity demanded would go up and hence the price would go up at the same level of supply (Baumol and Blinder, 2009). Thirdly, the increase in the price of the complements would reduce the demand for the product and the increase in the price of the substitute would result in the increase in the demand for the good. Law of supply The law of supply states the direct relation with the price of the product and the quantity supplied. When the prices are high, the quantity of goods supplied would also be higher and vice versa. The producers prefer to sell larger quantities at a higher price because the revenue is maximised in that way. The supply curve is a upward rising curve because of this direct relationship. Factors that change supply There are a number of reasons that may result in the shifts in the supply curve. First of all, the imposition of taxes or subsidies might have an effect on the quantity supplied of a particular commodity. In addition to this an introduction of a new technology in the process of production may drastically increase the supply of a particular product (Kreps, 1990). The changes in the cost of the raw materials that are essential process of production would alter the level of supply in the economy. The expectation of the market about of the future prices of the products may also have an effect on the level of supply. Finally, the size of the market is a major factor that would affect the supply of the products. Market equilibrium The market equilibrium is the definite combination of price and quantity of the product at which the quantity demanded is equal to the quantity supplied (Black, 1995). The interaction between demand and supply has been depicted with the help of the diagram below. In the above figure it can be seen that the initial demand and supply curve are Supply 1 and demand 1. These two curves interact with each other and the equilibrium is determined at the point E2. The price and quantity demanded at this point are P2 and Q3 respectively. On the other hand any shift in the demand curve, at the same level of supply would shift the equilibrium point to E3. Application of the demand and supply models The country of Scotland has experienced an increased in the demand for the housing properties. This rise may be as a result of the increase in the incomes of the households. The households may also expect that the future prices of houses would go up and hence they prefer to make their investment at the present point of time as this might be the appropriate time to buy properties (BBC News, 2013). Again the influx of workers in the area of Scotland is a reason for the rise in the demand. However, the numbers of units of houses that are available in the housing markets are not adequate to meet the demand among the consumers (BBC News, 2013). As a result the quantity demanded for housing is not equal to the quantity supplied. This is a case of demand and supply mismatch where the quantity demanded is greater than the quantity supply. Thus the price of the housing under such circumstances would go up. This is explained with the help of the following diagram. In the above figure it is seen that the original demand for housing is shown by the downward sloping demand curve. The supply curve at this level is depicted with the help of the upward rising curve in green. The interaction of the demand and supply curve determines the equilibrium prices and quantity demanded in the market. In this particular case the equilibrium price and quantities are P1 and Q1. Now due to the increase in the income of the households, there is a shift in the demand curve. This results in the new demand curve in red. In this particular case as stated in the article the level of supply of housing in Scotland have remained the same. Hence there is an increase in the prices of the housing from P1 to P2. Hence a new equilibrium would be formed at the interaction of the original supply curve and the new demand curve. Conclusion The essay is an attempt to assimilate the theoretical concepts of demand and supply in the practical world. The theory of demand and supply show how the prices and quantities are determined in an economy. There are a number of factors which affect the prices and the equilibrium quantity in a market. The housing market has been thoroughly analysed in this article and the changes in the demand and supply in the housing market has been analysed in light of the basic theory. It has been found out that a sudden shift in the demand curve for housing in Scotland has resulted in the rise in the prices of housing properties. References BBC News (12 Nov 2013). Scottish housing demand higher than supply. Retrieved from http://www.bbc.co.uk/news/uk-scotland-scotland-business-24908684 BBC News (8 October 2013). Rics survey finds rise in house prices as demand grows. Retrieved from http://www.bbc.co.uk/news/uk-scotland-scotland-business-24436356 Samuelson, P.A. and ‎ Nordhaus, W.D. (2010). Economics. New Delhi: Tata McGraw-Hill Education. Black, F. (1995). Exploring General Equilibrium. Cambridge Mass: MIT Press. Baumol W.J. and Blinder A.S. (2009). Microeconomics: Principles and Policy. Mason: South Western Cengage Learning. Kreps, D. M. (1990). A Course in Microeconomic Theory. New York: Oxford University Press. Read More