Question

Assume there is a well-defined geographic area of a city. The area is composed exclusively of apartments and is populated by low-income residents. The people who live in the area tend to stay in that area because

                     (1) They cannot afford to live in other areas of the city,

                     (2) They prefer to live with people of their own ethnic group, or

                     (3) There is discrimination against them in other areas of the city. Rents paid are a  

                           very high percent of peoples' incomes.

Questions:

(1) Would the demand for apartments in this area be relatively inelastic or relatively elastic? State why.

(2) Would the supply of apartments in this area be relatively inelastic or relatively elastic? State why.

Answer 1

1. The demand for apartments in this area would be relatively inelastic. Inelasticity means that with the change in the prices, the change in the quantity demanded is lesser than the increase in prices. Since the residents want to stay in that given place only so even when the price will rise, they would still choose to stay there implying the relatively inelastic demand.

2. Since the number of apartments available in a locality in a given time period is fixed, so in short run, the supply will be inelastic as even if the prices would rise, increasing the number of apartments cannot just happen overnight. But in the long run, the supply of apartments would be relatively elastic. So with the rise in the price of apartments, its quantity supplied tend to rise over time.