Case Study Using Demand and Supply Analysis

QUESTION 1 The demand for the apartments around that particular area will be relatively inelastic. When demand is relatively inelastic, a large amount of change in the price will still cause a small amount of change in the quantity. Assume that if there is a large amount of decrease in the price, it will only cause a small amount of increase in the quantity because the demand is relatively inelastic. Thus, the demand curve will be steeper. The factors that will cause the demand to be relatively inelastic are that the people who live in that area be likely to stay in that area because they cannot afford to live in other areas of the city.

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They prefer to live with people of their ethnic group and there is a discrimination against them in other areas of the city. Although the rents are very high percent of people’s incomes, they will still tend to stay in that particular area. Furthermore, the apartment has become necessity to the people who live in that particular area. Although there is substitute goods in other area of the city but they still tend to stay with their ethnic group because they don’t want to live with different ethnic people.

Thus, this caused the demand for apartments on that area to be relatively inelastic. In short-run, the demand tends to be inelastic because currently only that particular area is composed exclusively of apartments and is populated by low-income residents. However, in long-run maybe other area of the city will also have better apartments, same ethnic group, lower rental and other factors therefore the demand will be elastic in the long-run. On QUESTION 3 Figure 1. 0 will show the elasticity of demand will be at (D1). Price will be at (P1) and quantity will be at (Q1).

Equilibrium will be at point A. The demand curve will be steeper. QUESTION 2 The price elasticity of supply measures the relative response of a change in quantity supplied to a change in price. More specifically the price elasticity of supply is the percentage change in quantity supplied due to a percentage change in price. A given percentage change in price leads to a smaller percentage change in quantity supplied. When supply is inelastic producers find it very hard to change their production levels in given a time period.

The supply of apartments around that particular area will be relatively inelastic. In short-run, the factors that will affect the supply to be relatively inelastic are that due to the time period. Producers are unable to increase the supply of apartments in a short time period. For example, producer cannot suddenly build five apartments in one week. This indicates that no matter how high is the demand, the producers are still unable to produce due to the time period. However in long-run, producers can increase its production due to the time period.

The supply of the apartments will be elastic if there is plenty of spare capacity on that particular area, producer should be able to increase its output without an increase in costs and therefore supply will be elastic in response to a change in demand. However, the area is composed with exclusively of apartments. Producer cannot increase the supply because there is a limited land to expand no matter how high is the demand. Limited resources and labour also will affect the elasticity of supply because if there is not enough resources and labour, producer cannot build the apartments.

Thus, the supply of the apartments will be relatively inelastic. On QUESTION 3 Figure 1. 0 will show the elasticity of supply will be at (S1). Price will be at (P1) and quantity will be at (Q1). Equilibrium will be at point A. The supply curve will be steeper. QUESTION THREE [pic] QUESTION FOUR [pic] When government creates a rent supplement program to the consumer, demand for the apartment will increase because government helps the consumer to pay maximum 30% of resident income in rent. Any extra additional rent that exceeded will be paid by the government up to a limit.

This will lighten up their burden by decreasing their expenses and totally income also will rise. Therefore, the demand curve will increase because tenants pay lesser to rent the apartments and spending power of tenants also will increase. Thus, this will lead into a situation of shortage. For instants, renter’s salary is RM1000 and the tenant’s only needs to pay RM300 and the rest will be paid by the government. Figure 2. 0 shows when demand has increased it will shift the demand curve to the right from (D1) to (D2). Apart from that, price will also increase from (P1) to (P2) and this will lead to the quantity increase from (Q1) to (Q2).

Equilibrium point has shifted from point (A) to point (B). The supply curve remains unchanged. During the beginning of this supplement program, the renters of the apartment will gain apart from their 30% that paid by the government because the tenants will pay lesser for their rental expenses. Hence, the government will lose from the beginning. On the other hands in the future, renters of the apartment will lose from this supplement program because when time passes by the demand will increase and the owner or the producer of the apartment will increase its rents.

Government will only pay the certain amount of money up to a limit for the renter. Therefore, the tenants will lose from this situation, while the owner or the producers of the apartments will gain the most. Lastly, government will remain unchanged because government can gain back the money from the supplement program from the taxes that paid by the tenants or the producers. QUESTION FIVE [pic] When government decides to provide a building subsidy to the producer to build apartment in this low-income area and a certain percentage of their costs will be paid by the government, supply of the apartment will increase.

This will lead to a decrease on producer cost of production and decrease in price. Moreover, producers also can start to build more apartments than previously and increase contraction technology in order to build faster and safer because government will pay some of the cost on building apartments. This will lead to a profit for producers in order to build more and better quality apartments such as luxury condominium and others. Thus, this will lead to a surplus because of excess supply. Figure 3. 0 will show that when supply has increased, it will shift the supply curve to the right from (S1) to (S2).

The subsidy reduces the price of the apartments from (P1) to (P2). When the price has fall, quantity of the apartments will increase from (Q1) to (Q2). The total amount spend by the government on the subsidy will be at shaded area of the graph. Finally, the equilibrium point has changes from A to B. The demand curve remains unchanged. In the short-run, the producers and the renters of the apartment will gain because government impose subsidy. This will lead the government to lose because government spends a lot of money.

However, in the long-run, the producer and government will gain because government can cover up its expenses through taxes paid by the producers and the renters of the apartments. REFERENCE LIST: • Jackson J. , Mclver R. , Bajada and Hettihew (2004) “Economic Principles” McGraw Hill, Australia. • Jackson and Mclver (2001), “ Microeconomics and Macroeconomics “ • Economics for business and management edited by Alan Griffiths and Stuart Wall • http://tutor2u. net/economics/content/topics/marketsinaction/producer_subsidies. htm • http://tutor2u. et/economics/presentations/aseconomics/markets/ConsumerProducerSurplus/default. html • http://tutor2u. net/economics/content/topics/elasticity/elasticity_of_supply. htm ———————– Figure 1. 0 Price Quantity Equilibrium A Q1 D1 Relatively inelastic S1 Relatively inelastic P1 0 Figure 2. 0 S1 P2 P1 D2 D1 Price Quantity A B 0 Q1 Q2 Figure 3. 0 P1 P2 Price Quantity Q1 Q2 A B S1 S2 D1 Subsidy 0 Relatively inelastic demand and supply curve. Increase in demand of supplement program curve Increase in supply government subsidy