In the contemporary world, accommodation is a considerable issue for many people. Housing prices changes are an appropriate instance of effects, supply, and demand cause to price elasticity. Economic theories explain the compounds of apartments cost. In addition, they partially depend on particular economic variables. This essay will examine the major principles and the key factors, which have an influence on housing prices, and the methods to determine them.
The modern market is highly competitive because of the number of companies, which offer identical or similar options. Customers also influence the market by making the choices and directing producers of goods to the preferable ratio between the proposal’s gain and its price. Demand and supply analysis is a qualitative tool for forecasting grounded on the mentioned concept (Baye & Prince, 2013). This analysis is a part of the economic theory, by which the level of demand for a product is higher when its cost is less, and the opposite. The housing prices follow the same fundamental economic principle, called the law of demand (Baye & Prince, 2013). According to this rule, price and quantity demanded are inversely related and can be determined by the market demand curve (Baye & Prince, 2013). Graphic built on its basis interpolates the quantities consumers would at defined prices.
The other economic theory is based on consumer and producer surplus. It implies both the areas between demand and supply curves, respectively, and the market price (Baye & Prince, 2013). Following this theory, it is possible to calculate benefits from acquiring/selling houses for the price below/beyond the market-based one. If the cost is beneficial for customers, the demand will increase, and the opposite (Baye & Prince, 2013). This principle is essential for determining the optimal housing prices and understanding the causes of their changes.
Other Economic Factors
It is necessary to evaluate the overall effect of other economic factors, which influence housing prices, in addition to the mentioned theories. Variables, called demand shifters, influence customers’ willingness to buy an apartment (Baye & Prince, 2013). These factors change the price indirectly by affecting the number of houses buyers would acquire. Demand shifters include but are not limited to income, prices of related goods, advertising, population size, and consumer expectations. Houses are “normal” goods, as they have considerable demand elasticity that implies the direct dependence between population income and their demand (Baye & Prince, 2013). Therefore, producers tend to raise housing prices if their customers can afford to buy more expensive apartments. As the population grows, more people have to acquire accommodation which results in higher demand and prices (Baye & Prince, 2013). These factors may shift the demand curve to the right as more customers become interested in the promoted product.
The second type of variable that influences housing prices are supply shifters. These economic factors directly influence apartments’ costs and include input prices, technological changes, government regulations, the number of competitors, and taxes (Baye & Prince, 2013). The cost of resources is the first factor that forms the eventual price of goods. The decrease in supply causes a leftward shift in the supply curve which means selling less product at each value (Baye & Prince, 2013). Several firms building apartments results in a higher quantity of offered options, and therefore, a lower price. Consideration of all the mentioned factors assists in obtaining a realistic imagination about houses cost formation.
To conclude, consideration of housing prices provides the opportunity to determine the significance of economic theories and factors. The primary rule is the law of demand, complemented by consumer and producer surplus. These principles are essential for explaining the changes in the cost of apartments. In addition, other key economic factors contribute to housing prices formation. Demand and supply shifters are both presented with various variables, which impact the goods’ costs.
Baye, M. R., & Prince, J. T. (2013). Managerial economics and business strategy (8th ed.). New York, NY: McGraw-Hill Education. Web.