Question

4 Assume that you are about to buy an apartment (flat) in Mersin, and noticed that 2 bedroom apartments are offered at 250,000TL, and estimated quantity of flats purchased in the city is about 420 units. Firstly draw the market equilibrium level. Secondly it is noticed that construction input prices increased noticeable due to inflation. Thirdly consumers are negatively affected on buying houses because of nuclear power plant in Akkuyu. Fourthly change in demand is smaller than change in supply. Then explain how much price and quantity are likely to change in demand and supply on the figure. Finally show and explain new equilibrium on the figure.

Answer 1

Answer:

The graph:

  

Price S1 S 280,000 250,000 D D1 0 300 420 Quantity

a) Market equilibrium: Initially, equilibrium price = 250,000 TL, equilibrium quantity = 420.

b) Due to increase in the price of inputs, the supply curve shifts to the left, from S to S1, indicaitng a decrease in the quantity supplied and an increse in price.

c) When consumers are negatively affected, the demand curve shifts to the left, from D to D1, indicating a decrease in the quantity demanded and a decrease in price.

d) As the decrease in demand is less than the decrease in supply, the effects of supply curve are dominant.  The new equilibrium price will increase and the quantity will decrease.
(if the decrease in supply was equal to the decrease in demand, then price would remain the same.)