LEARNING OBJECTIVES
After you have read this section, you should be able to answer the following questions:
What factors underlie the demand for housing?
What factors underlie the supply of housing?
What determines the amount of housing traded and the price of housing?
The first two articles we quoted from made it clear that the housing market was heavily affected by the financial crisis. More than that, it was where the crisis began—and so it is where we begin our story.
We start with the market for new homes, which are part of real gross domestic product (real GDP). (The buying and selling of existing homes is not counted in GDP.) New homes are supplied by construction firms and demanded by families wishing to live in a new home. New homes are also bought by speculators who purchase houses in the hope that they can resell them for a higher price in the future.
Toolkit: Section 16.6 "Supply and Demand"
Supply and demand is a framework we use to explain and predict the equilibrium price and quantity of a good. A point on the market supply curve shows the quantity that suppliers are willing to sell for a given price. A point on the market demand curve shows the quantity that demanders are willing to buy for a given price. The intersection of supply and demand determines the equilibrium price and quantity that will prevail in the market.
The toolkit contains a presentation of supply and demand that you can use for reference purposes in this and the following chapters.
The supply-and-demand framework applies to the case that economists call acompetitive market. A market is said to be competitive, or, more precisely, to exhibit perfect competition, under two conditions:
- There are many buyers and many sellers, all of whom are small relative to the market.
- The goods that sellers produce are perfect substitutes.
In a competitive market, buyers and sellers take the price as given; they think their actions have no effect on the price in the market.
- 1574 reads
