Question

Suppose that we are analyzing the real estate market (new housing) and the costs of building such a house/dwelling fall (i.e. wood is cheaper, or wages are lower, or technology is improved). How would this affect the final equilibrium P & Q in the real estate market and why?

In order to answer the question and show the transition from the initial market equilibrium to the final equilibrium, you MUST follow the five step analysis in my lecture notes and video and explain what happens at each step/stage.

Optional: You may draw and include a demand and supply graph to support your answer and analysis. However, if the graph does not match your explanation, and vice versa, your grade will be reduced.

Answer 1

As the price of cost of building dwellings such as wood and wages decreases or the technology is improved the input cost of suppliers will decrease.

Decrease in input costs, will reduce the cost of production and hence, it will increase the supply and the supply curve shifts rightward.

As the cost of buildings decrease the prices of house/dwelling fall. A fall in prices will increase the demand for new houses in real estate market. And it will cause movement along the demand curve.

The equilibrium prices will fall and equilibrium quantity will increase.