# 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.

Sep 21, 2016

Refer Explanation Section

#### Explanation:

The market is competitive.
Other things remain unchanged.

a) A rise in the income of consumers. To begin with the demand for and supply of houses determine the equilibrium price and number of houses.$D D$ is the demand curve. $S S$ 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 $S S$ 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. 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 ${S}_{1} {S}_{1}$.

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.