The Supply Side of the UKs House Owning Phenomenon - Essay Example

? Economics work (1450 Words) and Section # of It has been observed in the last quarter that the demand of houses has been on the rise due to various factors. Even though the prices of the houses, which have moved upwards seems to suggest that the quantity demanded of the home shall go down. However, that has not been the case due to overall shift in the demand curve. Moreover, due to governmental polices there has also been an effect on the supply side on which we will elaborate as under. (Neate, 2013) Firstly, lets discuss some of the factors that may have been the cause of the shift in the demand curve are: a. Affordability of the customers: As mortgages have become less costly, the affordability of an average citizen has therefore gained growth. Moreover, mortgages are more readily available than before and therefore a consumer is more likely to avail himself a loan and increase his overall set of choices. Thus resulting in an increase in the demand shift of the consumer. (Neate, 2013) b. Recession: The pressures have double impact on the demand shifts. Not only it has reduced the purchasing power of a consumer but it has also taken away many sets of choices where a person used to invest. As recession is around, most of the investments are found to be riskier while these are also not expected to earn high returns. Therefore, potential investors, especially the large ones look at housing as a safe avenue for investment as the returns that it earns are quite stable while the capital gains are also a part of the investment. This also influences the demand curve to shift to its right and increase the overall demand of the house owning. (Neate, 2013) (O’sullivan, 2008) c. Herd Sentiment: It shall be noted that the growth of house prices has already outgrown the rate of growth in the loans extended in the form of mortgages. Such only reveals a point that the general public is following the trend. This can be due to reasons such as the fear of inflated home prices after the boom that these prices have received. Moreover, its cause may also be in the form of those investors who have looked it as a golden opportunity of capital gains and thus creating an artificial bubble of price inflation that will sooner or later burst out. (Rowley, 2013) d. Expectations: As prices have surged up so are the expectations of the people. As suggested in a recent article, the cost of average home may go up by 50,000 pounds in the course of the next five year. Moreover, keeping the sentiments in mind, the government’s recent move to provide interest free loan up to 600,000 pounds has only shifted the trend further and have once again given raise to the demands of the masses. (Lambert, 2013) If we point our attention to the factors that have may have impacted the supply side of the UK’s house owning phenomenon, the most important factor that grabs has shifted the supply curve includes the impact of exports whose disappointing performance has impacted the supply side of the above mentioned phenomenon. Since then, the government has focused more and more on supply side by encouraging the construction of more houses. Moreover, the lenders have been too lenient not only towards buyers but towards the sellers as well, since by supporting them in financing their projects they are pushing the supply curve as well, which in this case is toward its right. In a recent move, the government launched funding scheme which allowed banks to avail themselves inexpensive financing that allowed the lowering of the interest rates whose impacts were also seen on the demand side. (Rowley, 2013) 2. As one can see in the table below that the profits will increase to 40,000 pounds if the fare is decreased from 10 pounds to 8 pounds: Fare Demand Total Revenue New Cost Profit 8 6 480 440 40 10 4 400 410 -10 12 3 360 400 -40 (O’sullivan, 2008) a. Below are the calculations required in case of price elasticity’s of demand by the midpoint formula method as well as percentage change method. Price Elasticity of Demand (Mid Point Formula) = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)] (McConnell 76, 2012) Price Elasticity of Demand (Percentage change method) [(Q2 - Q1) / Q1] / [(P2 - P1) / P1] (McConnell 76, 2012) Fare Demand Change in Fare Average Fare Change in Quantity Average Quantity Mid Point Formula % Change in Fare % Change in Quantity Percentage method Elasticity of Price 8 6                 10 4 2 9 -2 5 -1.80 -0.33 0.25 -1.33 12 3 2 11 -1 3.5 -1.57 -0.25 0.20 -1.25 (O’sullivan, 2008) b. The fare of 10 pounds that was the original price was in no way the best fare, since the company could have earned more profit of 120,000 pounds by reducing its fare price to 8 pounds only. As for now, the company was earning 60,000 pounds which was half of what the company could have earned by reducing its fare. (O’sullivan, 2008) c. The company shall take into account the marginal cost of earning the revenue. In the given case, if marginal revenue will increase more than the marginal cost then it shall go on with the project. In order to assess the marginal cost, it shall not only include the marginal costs of the operations but shall also take into account the cost of acquiring the assets, depreciation that will charged upon these. Moreover, since the data above does not seem to fit up in a linear demand curve, therefore, one can only estimate the quantity demand by observing the changes that yield in its quantity given the change in price, also called elasticity. Thus by looking at the trend of the data that we extracted that a reduction in fare price by 2 pounds will lead to the increment in quantity demand by a much greater impact, and that will leave a positive impact on the firm’s profits. (O’sullivan, 2008) 3. Effect on the market of DVD players if a. Price of DVD rises: Since DVD Player and DVD are complementary products thus the increase in one’s price would lead to the decrease in the quantity demand of another. To elaborate it further, let us assume an extreme scenario in which the prices of DVD increases 100 times, this will push people to look for substitute products of DVD while it will discourage the sales of DVD as well as its players whose sales is dependent on DVDs. (O’sullivan, 2008) b. Price of DVD falls: As explained in an earlier example that the demand of the complementary product is influenced if the product’s price changes. In this case the decrease in price of the DVDs will lead to the shopping of more DVDs and thus there is a higher probability that people will shop more DVD players every year. (O’sullivan, 2008) c. Supply of DVD increases: The increase in the supply of DVDs will reduce the prices of DVDs and increase it quantity demanded. Therefore, people will utilize more DVD players. DVDs with its better price may reduce many substitutes and thus encouraging many people to shift from some other product to DVDs. This will lead to increased demand of DVD players and thus an increase in the demand of DVD players will be observed. (O’sullivan, 2008) d. Consumer’s Income decreases: A decrease in consumer’s income will negatively influence the demand curve of them as the demand will decrease while the demand curve will shift towards left to result in the decline of both the prices as well as quantity demand of the DVD players. Despite the fact that the prices of DVDs will fall but reduced demand will negatively impact its complementary product for two reasons. Firstly, the demand of a good depends on the demand of its complementary good, and decline in DVDs demand will negatively impact the demand of DVD players; and secondly, the decline in the purchasing power of the consumer in general terms, which is more appropriate reason in the given case. (O’sullivan, 2008) e. Wage rate of worker’s producing DVD increases: This will increase the cost of DVD players, after which the producer have two choices i. Increase the price to pass the impact to consumer ii. Keep prices constant while let the profits decline In the first case, the price increase will reduce the quantity demanded of DVDs and therefore it would once again, negatively impact the demand of the DVD players. While in the other case, the reduced margins will lead to reduced supply of the product will lead to increased price and a decline in the quantity demanded. In both the cases the price has to shift upward, however it would depend upon the preferences of the consumer and producer that will decide the strategy of the producer. The likely scenario in this case is case ii, since it is assumed that the equilibrium point is fixed. (O’sullivan, 2008) f. Wage rate of workers increase while the demand also increases: In this case the cost of the product which may lead to reduction in the profits and thus reduction in the supply of the product, however the increased demand will further push the prices upwards while giving increment to the quantity demand as well. Thus the overall impact in this case would be increase in quantity demand with a much greater increase in the price. (O’sullivan, 2008) BIBLIOGRAPHY Mcconnell, C. and Brue, S. (2012) Microeconomics. Boston: McGraw-Hill/Irwin. Neate, R. (2013) Housing market predicted to revive in 2013 with more than 1m to move home. [online] Available at: http://www.guardian.co.uk/business/2013/apr/15/housing-market-revive-2013 [Accessed: 25 Apr 2013]. O'sullivan, A. and Sheffrin, S. (2008) Microeconomics. Upper Saddle River, NJ: Pearson Prentice Hall. Rowley, E. (2013) Housing market 'at three-year high', says RICS survey - Telegraph. [online] Available at: http://www.telegraph.co.uk/finance/personalfinance/houseprices/9979554/Housing-market-at-three-year-high-says-RICS-survey.html [Accessed: 25 Apr 2013]. This Is Money (1997) Property sales are on the up while mortgage rates fall. What next for house prices?. [online] Available at: http://www.thisismoney.co.uk/money/mortgageshome/article-1671748/House-prices-What-expect--news-predictions.html [Accessed: 25 Apr 2013]. Read More