Consider a market for houses (the real estate market), which has suffered consid

Question

Consider a market for houses (the real estate market), which has suffered considerable declines in both the quantity and price of houses traded in the market. Please identify at least three factors that affected supply, demand, or both, and for each factor, explain whether this factor was a determinant of supply or demand, the resulting shift in the affected curve and its direction, and the impact on price and quantity. Please make sure that your examples cover at least three different determinants of supply and/or demand.

Explanation / Answer

Factors that have affected the market for houses: 1) The availability of credit from banks. 2) The unemployment rate. 3) Increased crime in an area. Explanation of the above determinants: 1) The availability of credit from banks has decrease due to the bursting of the credit market bubble. Banks are now afraid to give out loans with the fear that people would default on them. Thus with less credit available, people do not have the funds necessary to buy a house, thereby shifting demand left because fewer individuals would be able to enter the market for home ownership. 2) The unemployment rate increased recently thus having a similar effect as the first determinant above on the demand curve. With less jobs available, overall household income decreases (during a recession), thus the demand curve shifts left because there are insufficient funds to maintain a monthly mortgage. 3) Increased crime in a neighborhood devalues the houses surrounding that area. With an increase of recent crime within a specific area, prices of houses fall, thus shifting the supply line left. At the same time, due to the increase in crime, demand for an area would fall due to safety concerns, thus shifting the demand curve left. A unilateral shift of both the demand and supply curves would occur.

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