How Demand and Supply Affect Activities in the Property Markets - Essay Example

How Demand And Supply Affects Activities In The Property Markets Executive Summary The concepts of demand and supply underpin the very basics of economics. In a free market economy, demand and supply interact with each other to determine the market equilibrium i.e. a price at which the quantity of goods demanded equals the quantity supplied. The property market also operates in somewhat a similar manner. The main factors outlaying the demand for property include the demographic structure of a society along with the level of disposable income. Interaction of the supply and demand curve for property determines the value of the property in this case. This report goes into great detail to explain the basic economic concepts of demand and supply and how they apply to the property market. Demand And Supply In The Property Market Demand and supply are one of the most basic economic concepts, yet their applicability is extremely wide spread in our daily lives. In a free market economy, it is the interaction of demand and supply which determines the quantity of goods to be bought and sold, and consequently the price at which this transaction would be carried out. This level is known as consumer equilibrium and can be shown on a graph when the supply and demand curve intersect each other. Demand simply refers to the amount of goods or service that a person is is willing and able to purchase at a given price level (Turvey, 1971). The demand for a product and its price are inversely related, that is more goods are demanded when their prices are low as compared to when their prices are high. The demand curve is a downward sloping curve with price and quantity on its axes and depicts whats just mentioned above. There are many factors which influence the demand of a product like the availability of substitute and complementary goods, tastes of people, the level of disposable income, the elasticity of demand, customer expectations and expectations of future. Supply on the other hand is related to suppliers and it refers to the the quantity of good and services that are made available by suppliers in the open market. Totally opposite to the law of demand, the supply of goods and their price are directly related, that is suppliers are willing to supply more quantities of goods at higher prices then as compared to lower prices. Consequently, the supply curve is a upwards sloping curve, having price and quantity on its axes respectively. As with demand, there are certain factors which influence the supply of a product. Some of the main factors include the price of the input, expectations of the future, the current state of technology available, the price of substitute and complementary goods and the number of suppliers in the market. Market equilibrium can be defined as the combination of quantity and price level where the quantity of goods demanded equals the quantity of goods supplied. This point can be determined on the graph where the supply and demand curve intersect each other (Turvey,1971). There are also situations when a demand or supply curve simply shifts inwards or arches outwards. A demand curve shifting outwards simply means that more quantities of goods are now demanded at the same price level as compared to before. Similarly, an outward shift in the supply curve would mean that now the suppliers are willing to supply more goods and services at the same price level as compared to before. The demand curve, for example, shifts towards the outside when the level of disposable income increases (in the case of normal goods), the price of a substitute good rises and when the price of a complementary good falls. On the other hand, outward shifts in the supply curve are usually experienced due to betterment in technology which results in lowering the cost, or when bumper crop is produced in a season. The theory of demand and supply affects activities in the property markets in pretty much a similar manner as it does in any other market. However, there are are a few different factors which need to be properly understood here before we go into great detail. When the principle of supply and demand is applied to the housing or the property market, it refers to the ability and willingness of consumers to pay for the property/household alongside the relatively scarce supply of household resources. For any kind of goods (including property) to have a good value in the market place it must have or possess four characteristics. They include demand for the product, scarcity, its ability to be transferred alongside the utility that can be derived from the use of the good itself. We have already defined demand above as the ability and willingness of a person to purchase goods and services at a given price. Utility on the other hand refers to the satisfaction that is derived from purchasing a good. Scarcity on the other hand means that the demand must exceed the supply for a product in a given market, thereby giving a higher price level. The final and most essential factor that gives a product a good market value is transferability. Transferability refers to the ability to transfer the ownership of the goods to another person so as to let them value from the product besides the person who originally owns it. There are many different participants in the property market, and to understand how the demand supply effects the property market we first need to discuss these participants and their roles. One of the main participants is the owner, who plays the role of an investor and purchases property purely for the purpose or leasing or renting it out. Then there are renters, these being the consumers who rent property for their own personal usage. Then there are developers, these being the people who prepare land for the building purposes. Other then that, the property market features renovators, these being the people who are held responsible for supplying buildings that have been refurbished into the property market. And then finally there are facilitators like bank, brokers and lawyers – simply put, those professionals who aid in brokering property related deals. In order to apply the demand and supply mechanism to the property market, we first need to understand which participants form the supply side and which participants form the supply side of the property market. Renters and owners form the demand side of the property market, whereas facilitators, developers and renovators make up the supply side of the property market. Demand for property is mainly determined by population trends. Generally demand for property is seen to gain pace when a countrys birth rate experiences an increase and consequently the death or mortality rate goes down. Other demographic variables which determine the demand for property and housing include the current population size and the rate at which the population is growing. Besides that other factors like personal income, property prices, availability of property financing schemes, investor preferences and price of supporting goods (both supplementary and complementary) are other major determinants of demand. The concept of elasticity also needs to be mentioned when determining the demand side of the property markets. Studies carried out throughout course of history have generally proven that income elasticity of demand for property is usually usually inelastic. This simply means that changes in income levels do not have major effect of the quantity demanded of property. Suppliers (in the case of property markets, developers and facilitators) can use this fact, along with the price elasticity of demand to increase the property prices by playing with the supply and bag in extra profits. Similarly, studies have also shown that price elasticity of demand for property also tends to be inelastic. Supply for property is produced using some major inputs, and they are the factors which determine the eventual price of the property. Such inputs include land labor, capital, building materials and services of electrical devices and mechanical motors. On the other hand the quantity of the goods to be delivered is determined by the cost of these mentioned inputs, the property prices of the already available property in the market and finally by the technology involved in production of property. After a research carried out by George Fallis, he concluded that the in the long run, property supply is quiet elastic in response to price. On the other hand, in the short term, supply tends to be very much price inelastic. After the demand and supply side is properly understood and well determined, one can move on to interact them with each other. The interaction of the demand and supply curve simply gives the market price at which the stock of property would be cleared, or all sold out. References TURVEY, R. (1971). Demand and supply. London, Allen and Unwin. Read More