Prices and Markets for Demand and Supply Shocks -myassignmenthelp

Question: Discuss about thePrices and Markets for Demand and Supply Side Shocks. Answer: Case study Analysis: Housing Price in Australia Description of demand and supply side shocks The housing market in Australia has recorded a slow-down in recent months. After experiencing a housing market boom just a few years back the recent slow-down in quite surprising. The population in Australia has accounted fastest ever growth rate of 1.61% since 2014. The expected high housing demand from higher population growth fails to bring a steady growth rate for housing market. The interplay of supply and demand shocks in the market is responsible for such an outcome (Mankiw 2014). On the demand side there is both positive and negative shocks. The positive shock is from the more than expected population growth. However, the tight macro-prudential measures taken by bank regulators has retrained investors activity in housing market. Another force that pulling down prices is excessive supply of new houses in recent year. Evaluation of shocks As evidenced from past data, housing price is positively associated with population growth. The faster population growth should bring a faster increase in housing price. Population in Australia has accounted a decent growth rate of 1.6%. Despite this, housing prices tend to be flat and even lower in the coming forces. This is for the two simple reason. In the real market, demand and supply forces act together. The effect on price and quantity depend on combined effect of two forces (Baumol and Blinder 2015). The fact that population growth pulls up housing price has an underlined supply side condition. The condition states price increases only when additional demand fell short of addition supply that is newly constructed houses. In Australia however, the construction of new houses exceeds that of housing demand. Estimates show that, since 2012 the construction of new houses has increased by 66% reaching the availability of new homes to 212,000. As against this new home requirement ha s declined by 8% reaching to 170,000 (businessinsider.com.au 2018). The second factor causing a decline in housing price is the constraint in credit availability imposed by higher interest rate and tight outlook for macro-prudential measures. These factor restrain housing demand and often offset positive demand side impact from population growth. Prediction of future outcome The future outcome in the housing market however depends on the relative strength of supply and demand side forces. The increase in population increases demand. This has an upward pressure on price. Construction of new houses raise supply of houses. The increased supply has a tendency to pull down prices. If the demand force dominates, then housing price will increase and if the supply force dominates then house price declines (Ashwin, Taylor and Mankiw 2016). At present, the supply force dominates the Australian housing market. The market now faces excess supply of housing and this will continue to be the case for the next four years (businessinsider.com.au 2018). Apart from excess supply the second possible factor pulling down housing market is constraint in available credit. Credit cost, available credit and economys health play important role in determining price . There is evidence that measures undertaken to restrict investors activity has contributed to a decline in housing pr ice in the last year. Illustration of market equilibrium mechanism Figure 1: Effect of increased supply and demand in the housing market (Source: as created by Author) The initial supply and demand curve in the housing market are given as SS and DD. At equilibrium E, the housing price is P1 and equilibrium number of houses is H1. An increase in housing demand caused by increasing population leads to an outward shift in demand curve from DD to D1D1. The new construction of houses shifts the supply curve from SS to S1S1. Consequently, price falls to P2. Figure 2: Effect of credit constraint in housing market (Source: as created by Author) The constraint in credit supply shifts the demand curve inward from D1D1 to D2D2. At new equilibrium E2, there is a larger fall in price to P2. References Mankiw, N.G., 2014.Principles of macroeconomics. Cengage Learning. Scutt, D. (2018).Population growth may not be enough to prevent a downturn in Australia's housing market. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australia-house-prices-could-fall-despite-strong-population-growth-2017-12 [Accessed 19 Mar. 2018]. Ashwin, A., Taylor, M.P. and Mankiw, N.G., 2016.Business economics. Nelson Education. Baumol, W.J. and Blinder, A.S., 2015.Microeconomics: Principles and policy. Cengage Learning.