Markets: Supply and Demand and Positive Income Elasticity Essay

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Chapter 6 Notes
The housing market
• Elasticity of supply is very low- as it takes time build houses and therefore it is not possible simply to respond immediately to additional demand .
• Government intervention in the market through planning controls limits the availability of building sites.
• Antagonism from existing residents who worry about the increasing environmental cost of additional housing , pressure on the social infrastructure, especially in the South-east, where congestion is already an issue and schools and other amenities are over-subscribed.
• Shortages in the actor markets as the Uk has a lack of skilled building tradesmen.
Demand has outstripped supply for a number of reason:
• Social and demographic trends, such as people choosing to live alone as well as people living longer.
• strong positive migration patterns as foreign workers come to the UK
• Continued economic growth in the UK has led to rising incomes and relatively low interests rates that have increased pressure on housing demand.
• Houses are seen as an investment good that will continue to increase in price and price rises lead to increasing demand from those desperate to get onto the housing ladder.
There are several concepts that could be considered and you would be advised to keep them in mind when considering the housing market:
• The link with the demand for housing and income elasticity
• The relationship between interested rates that reflect the cost of repaying a mortgage(long term loan) that is taken out to buy property and the demand for house.
• the lower interests rates reflect the falling cost of a complementary product and as they close complements we would expect the cross price elasticity of demand to be high and negative.
• Renting is a substitute for buying but is often seen as an inferior good-this should suggest that demand for house ownership has high positive income elasticity of demand.
• For substitute goods we would expect the cross price elasticity of demand to be positive.
• the likely effects of a continuous programme of house building is already crowded areas on congestion, pressure on services and environmental degradation. In areas where green recreational land is scarce such a building programme is clearly not sustainable.
• You might consider that there is both market and government failure. The market fails to increase supply in the short term and in the long term is unable to do so as the government intervention through planning controls further restricts supply.
Agricultural markets
The agricultural market suffers from particular problems that are not present in other markets:
• In free markets agricultural prices fluctuate from year to year depending on the level of output affecting both the farmers income and ability to makelong-term plans.
• Production in many years parts of the world is still subject to unplanned variations due to factors beyond human control like pests, bad weather and natural disasters. In some cases this has led to the setting up of buffer stocks to ensure consistent supply and income to farmers. The authorities sell from the stock hen harvests are poor and buy in stock when harvest are good. This prevents huge price increases in bad times and low farmers' incomes when harvest are good.
Agricultural commodities
• Demand has increased for corn, suagr, palm oil, rape seed, oil , coconut oil andsoybean oil beause the need for bio-feuls as a subsituite for fossil fuels has increased
• demand will grown from emergig countries such as China and India.