Since the end of the Great Recession in 2009 the number of new households establ
ID: 1224836 • Letter: S
Question
Since the end of the Great Recession in 2009 the number of new households established has increased, it became increasingly difficult to obtain a mortgage loan to purchase a house, and the economy has been expanding increasing household income. Consider the effect of these events on the market for rental apartments in apartment buildings between 2009 and 2015.
1. How is the product defined?
2. How is the price of the product measured?
3. Which rental apartment’s demand and/or supply determinant(s) is/are affected?
4. What would be the direction of the change in the demand and supply of rental apartments?
5. What would be the effect of these events on the direction of the change in equilibrium price and quantity of rental apartments?
6. What would be the effect on the profits of apartment owners?
7. What effect would the change in profits of apartment owners provided in answer to #6 above have on the number of firms in this industry, assuming a length of time long enough for changes in the number of firms in the industry to occur?
Explanation / Answer
Part 1
The product which is to be studied is the Number of Apartments Rented.
Part 2
The price of the product is measured by the interaction of the forces of demand and supply. The rent fixed for the apartments would be at the level where demand for rented apartments equals the supply/availability of apartments for rent.
Part 3
The factors of demand for rental apartments being affected are as follows:
1. Difficulty in the procurement of substitute products - The substitute for rental apartments is the purchase of apartments. As the purchase of apartments is becoming difficult thus households would demand more of rented apartments.
2. Increase in household income - The income of households is increasing thus people will be demanding more of rental apartments.
Part 4
The demand would increase, i.e., there would be a rightward shift of demand curve.