Question

Every year, the housing market in Stamford, CT, has the same experience: The demand curve for housing shifts rightward by 500 homes, 500 new homes are built, and the price of the average home doesn’t change. Using supply and demand diagrams, illustrate how each of the following new events, ceteris paribus, would affect the price of homes in Stamford over the current year, and state whether the price rises or falls.

a. Because of special tax breaks offered to Stamford home builders, 800 new housing units are built during the current year.

b. Because of events in the overall economy, interest rates fall.

c. The Stamford city council passes a new zoning law that prevents any new home construction in Stamford during the year.

d. Because of the new zoning law, and the resulting change in home prices, people begin to think that homes in Stamford are a better investment than they had thought before.

e. Five hundred new homes are built in Stamford during the year. But that same year, an earthquake destroys 2,000 preexisting homes. As a result of the earthquake, 3,000 homeowners decide they no longer want to live in or own homes in Stamford.

Answer 1

ans a)There will be a situation of excess supply of homes and this will shift the supply curve outwards. The prices of houses will fall.

ans b)The home loans will become cheaper. This will cause the consumers to demand more houses. This shifts the demand curve outwards. Excessive demand occurs.The price in real estate market will increase.

ans c)There will be a shortfall in supply. The supply curve will shift inwards. The price in real estate market will increase.

ans d) This shifts the demand curve outwards.There is excessive demand. The price in real estate market will increase.