Rents+rise+as+supply+and+demand+favours+landlords

=**__Title of the Extract: __** Rents rise as supply and demand favours landlords =


 * __Source: __ []**


 * __Date Extract was written: __**

September 17, 2010

= __DATE CURRENT EVENT WAS WRITTEN:__ =

March 27, 2012


 * __Explanation of the economic theory related to the article: __**

 According to the article, the house prices are increasing “steeply.” A number of factors play role in this phenomenon. House purchase market and house rent market are **__substitutes__** of each other. Therefore, if the price of one of these two increases, then the quantity demanded for the other increases.  However, this case is a bit different. Even though the price of the purchase market for house did not change, the **__demand__** on the product significantly dropped. This phenomenon occurred because first, people are aware of risks that the house prices might crash. Second, access to mortgage finance has become tougher, so people are not able buy the house. The decrease in demand, or left-shift of the demand curve in fact causes the equilibrium price to drop. As the demand curve shifts left, the quantity decreases and the price also decrease.  However, house is a **__necessity__**, therefore people begin to turn their eyes to the rent market. The decrease in demand in the purchase market has caused the demand for the rent market to dramatically increase, shifting the demand curve to the right. As demand curve shifts to the right, the price and quantity of the equilibrium both increase.  The change in **__supply__** also plays an important role in the increasing rent. According to the article, the landlords who put their properties up for rent when the market froze during the financial crisis have now turned back to the purchase market. This indicates that the supply of the house rent market has decreased. Decrease in supply causes the quantity to decrease and price to increase.  It is also can be said that the house rent market is in **__shortage.__** In this market, demand is very high but the supply is not as high because the price is too low. Therefore, the price constantly increases until the new equilibrium is set at the very high price, unless any factors cause supply to increase or demand to suddenly decrease—the situations practically impossible to occur.


 * __ Vocabulary Terms and Definitions __ **


 * Supply ** : he quantity of a good or service that producers are willing and able to purchase at a given time period


 * Demand ** : The quantity of a good or service that consumers are willing and able to purchase at a given time period


 * Subsidy ** : amount of money paid by the government to a firm, per unit of output


 * Opportunity Cost: ** The next best alternative choice when an economic decision is made


 * Shortage:** A market in which price is too low that the quantity demanded exceeds the quantity supplied


 * Necessity:** Goods or services that are indispensable in people's lives


 * Substitute:** Goods or services that can be puchased instead of a product


 * __ Diagrams __ **

Diagram 1: Substitute

Diagram 2: Decrease in demand for house purchase market



Diagram 3: Demand increased, Supply decreased in house rent market



Diagram 4: Shortage



Diagram 5: Increase in supply to remedie the shortage



**__Evaluation __**

 The article suggests that the consumers are suffering due to the increasing rents. Therefore the government can choose to control the price. First, government can increase the supply to resolve the shortage. This causes the equilibrium price decrease and quantity to increase, remedying the shortage.

 Government can increase the supply by using two ways. First is to directly intervene in the market by supplying the houses to the consumers. This is worth trying because directly increasing the supply curve is one of the easiest way to remedy the problem, and moreover, in long term building houses give others opportunity to find places to live. The two biggest problems of this method are **__opportunity cost__** and time. In order to build the houses, the government has to spend at least two to three years. However, in the future the market might have become already stabilized, so whenever the government finishes building the new houses, they might affect the market in negative way (we do not know the future, so too much risks). Opportunity cost is another problem. Government can spend money spent to supply new houses to other things such as subsidizing the firms or cutting down the taxes.

<span style="font-family: Arial,sans-serif; font-size: 11pt;"> Another solution is to give firms __**subsidy**__. By subsidizing the firms, firms might be able to provide more houses. The subsidy can be in the form of decreasing the taxes or directly subsidizing the firms. Subsidy increases the supply, causing the price to drop and quantity to increase. Again, the problem of giving subsidies to the firm is opportunity cost. Government can spend the money spent to subsidize the firms for finding other methods to resolve the problems. Another problem is that <span style="background-color: white; font-family: Arial,sans-serif; font-size: 11pt;">Subsidy can make the firms inefficient. If the firms get subsidy, then they take the dominant position on the competition between other firms that did not get the subsidy. As a result, the firms may not compete with each other and grow very inefficient, harming the economy. Furthermore, in order to subsidize the firms, government has to collect additional taxes from the consumers—the government is giving and taking money back at the same time.