Question

The term “Amazon Effect” is used to represent what happened with the Seattle’s urban area after Amazon opened its headquarter in Seattle (which was then followed by other big companies such as Google and Facebook). As usual, there are pros and cons; we will not get into that. Instead, let’s focus specifically on the impact of the Amazon effect on Seattle’s housing market. The impact is clear: a steep increase in the Seattle housing price. The graph below shows a hypothetical equilibrium of supply and demand of housing in Seattle before Amazon effect occurred. Using the Supply/Demand framework developed in class: 3.1. Show graphically the impact of Amazon effect on the Seattle housing market (ceteris paribus assumption applies). 3.2. Explain why the increase in the housing price is very steep, as opposed to a mild annual increase we commonly see across the US.

Price of House in Seattle So 0 Po 0 Quantity of House Supplied/Demanded Qo

Answer 1

A) With Amazon opening its headquarters in Seattle, it became a favourable and attractive place for all big organizations to open their office their and make it a business hub. This led to vast increase in the demand for houses in that area, as people or employees wanted to stay as near as possible to this area in order to reduce their commute time. Also, households wished to purchase and invest their money in houses in that area so as to sell it later at high prices or put it up on rents. Thus, demand for housing increased excessively, shifting the demand curve to the right, as shown below: Price of House in Seattle So Po D1 Quantity of House Q1 Thus, prices of housing increased excessively. Also, since the supply of houses is limited, it increased the prices further. b) This is because the increase in demand exceeded the increase in supply of houses in Seattle.