The Market Demand of UK Owner-Occupied Housing - Essay Example

Economics Level Undergraduate Degree Answer a) One of the main objectives of Economics is to utilize the scarce resources most effectively. For utilizing scarce resources, economists need to take certain decisions. Hence, a decision made can also be equated to a choice made. Furthermore, for making a choice, it is necessary for two or more commodities to exist. As a result, one commodity will be the first choice and another one might be the second best choice. For example, an automobile company has resources to produce 100 sedans (Saloon) and 80 SUV’s. However, the manager makes a choice of producing 120 sedans and 60 SUV’s. The opportunity cost of producing 120 sedans therefore is the 20 units of SUV’s. Therefore Opportunity cost is the process of choosing one good or service over another. The item which is forgone is the opportunity cost. Answer 1 b) The law of demand is the most famous law of economics. It states that when the price of a commodity or good rises, the amount demanded for that commodity falls. Conversely, the amount demanded for the good rises when the price of that good falls. There are a number of factors which influence the demand of a product and cause the demand curve to shift to the left or right. If we take peanut butter as an example of a product, the first factor which will cause the demand curve of peanut butter to shift to the right will be the increase in the number of potential buyers for peanut butter. Another factor which can cause peanut butter’s demand curve to shift right would be when the price of jelly (a substitute product) increases. Now, one factor which can shift the supply curve of peanut butter to the left would be increase in prices of the raw materials and inputs for producing peanut butter. This would make the seller less inclined to supply the same quantity of peanut butter at a given price. The second factor which will shift peanut butter’s supply curve to the left is when the seller expects the price of peanut butter to increase in the near future. This would make the seller decrease the quantity of peanut butter currently supplied at a given price in order to supply more peanut butter when the price increases. Answer 2 a) There are several variables that might cause the market demand of UK owner-occupied housing to shift. The four main conditions which are likely to cause the market demand of UK owner-occupied housing to shift are: Increase of real incomes Confidence of consumers The job market Alterations in subsidies and housing taxes Increase of real incomes –Privately owned housing is preferred by most people. Hence, with the rise in average living standard, the market demand for UK’s owner-occupied housing will expand. Confidence of consumers- In the housing sector, buyer confidence is a crucial factor. If there is an impending economic gloom or people are worried over their financial security, they would tend to delay their entry into UK’s owner-occupied housing. The job market- Availability of jobs would allow potential buyers to make a long-term financial commitment, since an owner-occupied house is generally purchased through a mortgage lender. In areas of UK where the unemployment levels are high, the demand for housing would decrease. Alterations in subsidies and housing taxes- The policies of the UK government such as the payment of stamp duty on the properties that are posh has an effect on the housing sector as well. Answer 2 b) There are in fact numerous factors which may cause the market supply of UK owner-occupied housing to shift. It ranges from the number of new houses which are being constructed in UK to the number of existing house owners who are willing to sell their house and the number of houses which are being renovated and then being put up for sale. Again, each one of the three aforementioned factors might be affected by factors such as the price of the house, governmental policies and legislations, the current trend in employment, the demographics of age in an area and also planning regulations in UK. Additionally, the cost and availability of land in major urban areas of UK and the cost of short-term credit are two factors that may cause the market supply of UK owner-occupied housing to shift. Answer 3 (1) Using the formula for The Price Elasticity of Demand which is: PED = (% Change in Quantity Demanded)/ (% Change in Price) Or the % Change in Quantity demanded= [QDemand (NEW) – QDemand (OLD)] / QDemand (OLD) And the % Change in Price= [Price (NEW) - Price (OLD)] / Price (OLD) We get:{[Estimated Demand (NEW) - Estimated Demand (OLD)]/ Estimated Demand (OLD)}/{[Bus Fare (NEW) - Bus Fare (OLD)] / Bus Fare (OLD)} To estimate the price elasticity of demand between 8p and 10p, we first calculate the percentage change in miles per year demanded. Filling in, we get: [6-4]/4= 0.5 We then calculate the percentage change in price. By filling the values, we get: [8 - 10] / 10 = (-2/10) = -0.2 Therefore the Price Elasticity of Demand between 8p and 10p is: 0.5 / (-0.2) = -2.5 Next, taking 10p and 12p: Calculating the % change in miles per year demanded, we get: [3-4]/4 = -0.25 We again calculate the % Change in price: [12-10]/10= (2/10) = 0.2 Therefore the Price Elasticity of Demand between 10p and 12p is: (-0.25) / 0.2 = -1.25 Answer 3 (2) 10p wasn’t the best fare originally, since 10p yielded a profit of £60 000(£400 000 - £340 000). In contrast, 8p originally yielded a profit of £120 000(£480 000 - £360 000) and was the best original fare. Answer 3 (3) 3 If the fare is lowered to 6p, the estimated demand is calculated to be 8.5 million. Now looking at the chart (Attached below), we find that the total revenue is calculated by multiplying the fare with the estimated demand (Miles/million). Hence, by multiplying 6p with 8.5 million, we’ll have total revenue of £510 000. It is therefore advised that the company lowers the fare to 6p as the company will make a profit of £20 000(£510 000 - £490 000). Fare(Pence per mile) (1) Estimated demand (Miles / yr millions) (2) Total revenue (£per year ) (3) Old cost ( £per year ) (4) New total cost ( £per year) (5) 8 6 480 000 360 000 440 000 10 4 400 000 340 000 410 000 12 3 360 000 330 000 400 000 6 8.5 490 000 Sources Carbaugh, Robert J. International Economics: College Edition. South-Western, 2003 Mankiw, N. Principles of Economics: International Edition. South Western College, 2009 Read More