Essay on Price elasticity

Submitted By gabyraudales
Words: 1252
Pages: 6

Assessment 2

Price elasticity of demand is defined as a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. (www.investopedia.com). In a most simple way elastic demand means that clients acquire more products or services when prices are lower or less if the prices are higher, or vice versa depending on other factors. There are two types of demand elasticity. 1) Elastic demand or high price elasticity, this happens when the quantity demanded changes the same percent that the price does. 2)Inelastic demand or low price elasticity, this occurs when the quantity demanded changes less than the price does (wwwuseconomy.about.com)

There are many products that have elastic demand a good example is housing. Even though everyone needs a place to live, there are many options townhouses, apartments, condos, or simple live with parents and friends. In 2006 demand for housing was based by low prices mortgages. The houses prices were high, but mortgages were lower, the interest’s rates set by the Federal Reserve were low. Therefore, houses’ demand increased. This was called housing bubble period. From 1991-2005 housing demand was from $264 billion - $586 billion, reaching the peak in 2006. However when housing bubble period came to the end, in just 3 years demand decreased to $351.3 billion, which means that in 2008 demand declined by 40.1%. (www.bls.gov). When bubble period crashed, housing prices fell. Nevertheless the demand also fell, in fact the average national home price fell 28%, more than during the great depression. (wwwuseconomy.about.com).

Housing demand in United States is different to majority of products that demand raises when the price is lower, in this case demand rises although the price is high. This different is due to other factors that surround customers. Unfortunately, recession in United States caused a huge unemployment, so many people were in bankruptcy, and income was much lower. There also were an increased in foreclosures rates in 2006-2007, this made that many people lost their homes, and many of them had to move back with parents, relatives or friends. This event had a great impact to US, in 2007 the US Secretary of Treasury called the bursting housing bubble “the most significant risk to our economy” (Paulson, 2007). Until June last year housing prices started to rise in some states, so also demand started to rise.

There also are other factors that influence the demand of housing such as
Demographic, if the economy has many people, the demand will be greater, however is important to check family size, number of children, migration, death rates, marriages rates, divorces rates, non-family household formation, the number of double family households. Because for housing doesn’t count individual instated households
Income housing economics use permanent income because this is an expensive purchase, for some people the highest of entire life.
Cost and availability of credit how was explained during housing bubbles, credits rates were low, so houses demand was high even prices were elevated.
Customer preferences if they want house, townhouse, apartment. The neighbor that prefers, etc.
Investor preferences sometimes investors don’t give credits to their clients buy housing at some neighborhood.
Growths of real income many people when earn more money, move to better places, buy bigger houses.
Expectation of future price movement people likes to buy houses that increase the value over time.
Changes to the system of housing taxes and subsidies many people prefer to rent because taxes in their states are higher.

On the other hand there are products with low price elasticity, Petroleum can be mention. The price of petroleum can change and people have to continue their life, people can’t move easily where they live or work, and neither is easy to change car for another, therefore is little what they can do to rapidly reduce…