Microeconomics and the Laws of Supply and Demand
The Laws of Supply and Demand
The laws of supply and demand are detrimental to our economy today. It is what actually drives our market economy. Buyers determine the quantity produced of a particular product based on their demand for that product and the price he or she is willing to pay for it. Supply is then created by producers when and if they are willing to accept the current rate for which they will get from production of that product. At the end of the day, price is what drives supply and demand.
“The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that ...view middle of the document...
Lowering prices created a higher demand rate for two bedroom apartments because now people were able to afford living there, which is also called a demand curve downward slope.
When GoodLife increased the rental rates in order to maintain the properties, the demand went down. People naturally chose to live in a nearby community at lower rates. At this time a large company called Lintech Inc. “set up shop” in town creating jobs and higher demand for apartment rentals due to a growth in population. Even though GoodLife has increased their rates, people are willing to pay, thus creating equilibrium. Equilibrium is, “the state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium,” ("Equilibrium", 2014).
Time has passed and Lintech Inc.’s employees are now making more money than they were when they first arrived and now want to purchase detached homes versus renting something that will never be theirs which now creates another shift in demand for apartments. As the demand decreases the rental rates go down and people are willing to rent, once again, creating equilibrium.
Other companies move into town, causing more people to move into town, they’re making more money and the demand for apartments goes down due to peoples change in taste, lifestyles, etc. The government then puts a price ceiling on rental rates into effect and demand goes up, again. A price ceiling is, “the maximum price a seller is allowed to charge for a product or service. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices. Price ceilings are usually set for essential expenses; for example, some areas have "rent ceilings" to protect renters from climbing rent prices,” ("Price Ceiling ", 2014).
A Shift in the Supply Curve
While the demand for two bedroom apartment went up, the need to supply went down due to the change in price and acquiring more apartments, which caused the supply curve to go at an upward slope. One major factor for GoodLife was maintenance costs. In order to be able to afford maintaining more apartments, GoodLife would have to increase their rental rates. Increasing the rental rates naturally makes GoodLife want to increase the number of units rented.
When Lintech Inc. opens their business in town, GoodLife sees this as a greater incentive to increase the number of units available for rent. Because they have enough units available and people are willing to pay these prices, the market is...