Eco360 Supply & Demand SimulationEssay Preview: Eco360 Supply & Demand SimulationReport this essaySupply and Demand SimulationThe Supply and Demand Simulation (UoP, 2005) presented in the Economics for Business 1 class revolves around the supply and demand of two-bedroom rentals in the imaginary city of Atlantis. To complete the simulation, the user must assume the role of a Property Manager for GoodLife Management, a property management firm that manages seven apartment complexes within Atlantis. As the Property Manager, the user must adjust rental rates as changes in supply and demand require or determine how many units to supply when rates become limited. The Supply and Demand Simulation (UoP, 2005) emphasizes several economic principles outlined by Colander in his book, Economics (2004), including the laws of demand and supply, equilibrium, the effect of a price ceiling, and shifts in demand and supply.
Laws of Demand and SupplyIn the Year One scenarios, the simulation (UoP, 2005) demonstrates how rental rates affect the supply and demand for apartment units. In other words, price affects the supply and demand of available goods. The law of demand states that quantities demanded by consumers will increase as prices of a product decrease and the reverse is also true, quantities demanded by consumers will decrease as prices of a product increase, as long as all other factors remain constant. A demand curve shows an inverse relationship between the price of a product and how much of that product is demanded by consumers (Colander, 2004). So the demand for GoodLifes apartments will increase if GoodLife reduces the rental rate. The law of supply states that quantities supplied will increase as prices increase and decrease as prices decrease, as long as all other factors remain constant. The law of supply represents a direct relationship between prices and quantities supplied to consumers (Colander, 2004). This means that GoodLife will increase the number of apartments supplied if rental rates increase.
EquilibriumIn the Year Three scenario, the simulation (UoP, 2005) also shows how a market strives to achieve equilibrium, where quantity supplied and quantity demanded meet at an equilibrium price. If rental rates are below the equilibrium point then the number of apartments demanded exceeds the amount supplied causing a shortage of apartments. The apartment shortage exerts an upward pressure on rates (Online Texts.com, 2005). The increase in rates will then reduce the quantity of apartments demanded and raise the quantity supplied. The back and forth process of supply and demand following price will continue until equilibrium is achieved (Colander, 2004). If the scenario is reversed and the rental rate is above the equilibrium point then the number of apartments supplied exceeds the number demanded which causes a surplus in the market. The surplus will exert a downward pressure on rental rates which will increase the quantity demanded and reduce the quantity supplied (Online Texts.com, 2005). Once again, this adjustment process will move quantities supplied and demanded back and forth to counter balance rising and falling rates. Sooner or later, both rates and quantities will reach a balance, this is the equilibrium point, but equilibrium can only be achieved temporarily or within an economic model, because multiple factors affect the market and these factors are constantly changing (Colander, 2004).
The Effect of a Price CeilingOne factor that can work against a market trying to reach equilibrium is a price ceiling. A price ceiling is a law requiring that a price for a certain good be kept below some level which may lead to shortage and a black market (BizEd, 2005). The scenario in Year Nine illustrates how a price ceiling disturbs supply and demand changes. In the simulation (UoP, 2005), the government has imposed a price ceiling on apartments in order to help middle-income families find affordable housing in Atlantis. The price ceiling caps the rental rate at $1,550. The low rental rate increases the demand for the apartments; however, at this rental rate, GoodLife is not willing or able to lease the number of apartments that the company would be willing or able to lease out at a higher rental rate. The preceding situation leads to a shortage in the apartment market of Atlantis. Since the price ceiling keeps the rental rates from increasing, the market cannot adjust towards equilibrium and will remain in a shortage status until the price ceiling is removed (BizEd, 2005).
Shifts in Supply and DemandDemand can also be affected by income, consumer preferences, taxes, and subsidies. The supply curve can also be affected by technology, supplier expectations, taxes, and subsidies (Colander, 2004). These other factors cause the supply and demand curves to shift in or out depending on which factors are at work, these shifts affect the supply or demand at each price. In the Year Five scenario and both Year Seven scenarios, the simulation (UoP, 2005) illustrates shifts in supply and demand. The Year Five scenario has a demand shift because a new company moves into Atlantis. The increased population causes an increase in the quantity of apartments demanded. In January of Year Seven, the simulation (UoP, 2005) states that consumer preferences are leaning towards home purchasing instead of apartment rental. The change in consumer preferences causes a decrease in the quantity of apartments demanded in Atlantis.
The Supply and Demand Curve and Consumer Trends in the U.S.
A similar result can be found in the supply curves of the following countries: Denmark, Estonia, the Netherlands, Saudi Arabia and Italy. To measure the supply curves of these countries, we use a variety of measures. In general, a trend in consumer preferences and prices in this country has been associated with lower prices since the 1980’s. Consumer preferences in the United States were generally at an all-time high in 2014, increasing over the 3-year period. During the second half of 2015, these trends continued to have a positive correlation with the increase in the demand for home ownership.
U.S. Consumer Trends in the Second Half of the Year
In the second half of the year, U.S. consumer behavior changed slightly, with positive patterns in consumer preferences, prices and housing prices. In total, the number of home purchases that decreased in each year from the year before increased by 5.0% compared with the first four quarters. This increase of home purchases in the two months prior to December 31, 2014 is partially attributed to the rise in household purchases of the home. The decrease in home purchases in the two months prior to December 31, 2014 is partly attributed largely to a change in consumer preferences following the beginning of the current financial crisis. The decline in overall home purchasing is more pronounced in December. Overall, home purchases decreased in the month ending March 2015 compared with December 31, 2014.
The difference between the month ending March 2015 and February 2015 was 0.7% which represents the lowest quarterly decline in home purchasing as measured for the period (i.e., in 2014, it is more than three times the 0.6% decline recorded in January). Also, home sales declined in the second half of March and fell in the second half of September in a similar pattern. This decrease in home sales is not related entirely to consumer demand for home care and other services. The decline in new homes has been associated with an increased demand for home care products. Therefore, the higher demand for services in the second half of the year also reflects the return of home spending, not home purchases, as has been shown to be a strong reason for declines in new home purchasing.
The second quarter of 2015 has seen significantly higher levels of home expenditures than in the last three months of the year. The level of home expenditures increases following the economic downturn and by the end of 2016, the level of spending relative to the GDP will be higher than the economic stagnation in late 2015 and early 2016. The decline in home spending is associated with a lower rate of real GDP growth, which is a significant advantage due to lower real GDP.
The rise in the second half of 2015 is associated primarily with household expenditures, which has increased by 5.1%. All-time highs for these measures since 2013: annual US household spending increased by 13.3% compared with the same period in 2014, and annual US household spending increased by 11.3%. Home purchases in January and April were also significantly higher than in January 2015.
Conclusion
The availability of housing for a large part of U.S. households is growing slowly during the second half of the year. Housing affordability is not sustainable and increasing home ownership is not an ongoing process. The supply curve of the country’s housing market has been moving in the opposite direction toward a higher price or price target in the first few years of the decade.
Table 3 shows the expected trends for the first half of 2015 (Table 2 on page 11). The supply curve for the first half of the year is not necessarily positive. Home prices remain low in the first quarter and lower in the second half. For example, home prices in February