Transcript

Using a model of demand and supply to understand house prices – Part 1

NARRATOR

The model of demand and supply looks at the relationship between the price and the quantity of something that buyers will want to buy and sellers will want to sell.

The amount of property that people are willing and able to buy will depend on current prices.

If prices are high (measured on the vertical axis), relatively few people will be willing and able to buy (measured on the horizontal axis).

If prices are lower, far more people will be willing and able to buy.

The relationship will hold across the whole range of prices – the lower the price, the greater the number of people who are willing and able to buy.

Each dot in the diagram is an example of a price and the corresponding quantity demanded. If we join up the dots, we have a line that traces the relationship between every price and quantity demanded. This is called the demand curve.

Because we are looking at the market for housing as a whole, it’s called the market demand curve.

The next step in building our model of the housing market is to consider the supply side of the market.

If prices are low, relatively few properties will be offered for sale. If prices are higher, more potential sellers will appear.

This relationship will hold across the whole range of prices – the higher the price, the greater the number of people who are willing to sell. Each dot in the diagram is an example of a price and the corresponding quantity for sale.

If we join up the dots, we have a line that traces the relationship between every price and quantity for sale. This is called the supply curve. And since we are looking at the market as a whole, it is called the market supply curve.

Now we can bring together the demand curve and the supply curve onto a single diagram. We can now see that there is only one price at which the quantity people are willing and able to buy equals the quantity people are willing to sell.

This is the equilibrium price, to which we can give the convenient shorthand label P (for price) subscript e (for equilibrium).

The quantity demanded and supplied at this price is the equilibrium quantity, which, using the same convention, we can label Q (for quantity) subscript e (for equilibrium).

Before we go further, it’s important to note that the demand curve is not a record of the quantity of homes that have actually been bought at different prices over time. Similarly, the supply curve is not a record of the actual quantity of homes that have been sold at each price. Rather, they are the amounts that people would like to buy or would like to sell at each price. We cannot observe these amounts; we can only estimate them.

This means that every buyer who was only willing to buy at a lower price than the equilibrium price is out of the market.

Similarly, every seller who was only willing to sell at a higher price than the equilibrium price, is also out of the market.

To summarise what you have learned so far about the demand and supply model, you now know that: • The demand curve usually slopes downwards from left to right. • The supply curve usually slopes upwards from left to right. • The equilibrium price is the price at which the amount people want to buy equals the amount people are willing to sell – in other words, at the equilibrium price, demand equals supply.