Question

5 Assume that you are about to rent an apartment (flat) in Mersin, and noticed that 3 bedroom apartments are offered at 1200TL, and estimated quantity of flats rented in the city is about 2100 units. Firstly draw the market equilibrium level. Secondly it is announced that construction costs of buildings (flats) increased noticeably. Thirdly local population in Mersin continues to increase because of immigration from Syria. Fourthly change in demand is smaller than change in supply. Firstly explain how much price and quantity are likely to change in demand and supply. Then show and explain new equilibrium on the figure.

Answer 1

Answer:

The graph:

  

Price (rent) S1 S 2000 1200 D1 0 1500 2100 Quantity of houses

When construction costs increase, producers' profits decline. So, supply curve shifts to the left, from S to S1, indicating a decrease in quantity of houses supplied.

An increase in population due to immigration will increase the demand for houses. So, the demand curve will shift to the right, from D to D1, inicaitng an increase in the quantity of houses. But when both take place simultaneously, and decrease in supply is greater than the increase in demand, then the effect of supply curve will be stronger, and there will be increase in price and decrese in quantity.

(If both the supply curve and demand curve had shifted equally proportionately, then quantity would have remained the same.)