When considering a competitive market for apartments in a city. What would be the effect on the equilibrium price and output after the following changes (other things being held constant):?

a) A rise in the income of consumers.
b) A new construction technique allowing apartments to be built at half the cost.

1 Answer
Sep 21, 2016

Answer:

Refer Explanation Section

Explanation:

The market is competitive.
Other things remain unchanged.

a) A rise in the income of consumers.

Refer the graph

To begin with the demand for and supply of houses determine the equilibrium price and number of houses.#DD# is the demand curve. #SS# is the supply curve. They become equal at point #E_1#. #E_1# is the equilibrium point. #M_1# number of houses are supplied and demanded at #P_1# Price.

After an increase in the income of the consumers, The demand curve is shifted to right. The new demand curve is #D_1 D_1#. It cuts the supply curve #SS# at point #E_2#

The new equilibrium Price is #P_2#. This is higher than the original price.

The new equilibrium number of houses is #M_2#. This is greater than the original number of houses.

The Net result is a rise in price and number of houses.

b) A new construction technique allowing apartments to be built at half the cost.

enter image source here

The initial equilibrium is at point #E_1#. Equilibrium price is #P_2#. Equilibrium number of houses is #M_1#

With an improvement in technology, the supply curve will be shifted to right. The New supply curve is #S_1S_1#.

The new equilibrium point is #E_2#

The new equilibrium price is #P_1#. This is less than the original price.

The new equilibrium number of houses is #M_2#. This is greater than #M_1#.

The net result is a decrease in price and an increase in number of houses.