ECON1011 Lecture 2; Housing Crisis Part 1

Economics Lecture slides

1. ECON1011
Economics for Business
Lecture 2: Housing Crisis, Part 1

2. RiPPLE
•The hypothetical marks you earned during this week’s trivia round does not count
(sorry about that…)
•(Real) Round 1 starts next Monday, 5 August (Closes 23 August)
•Round 1 resources must be on Housing Crisisor Cost of Living
(Lectures 2 to 5)
•For thefull5marksfor Round 1, you need to:
–create one (1)
–moderate five (5)
–and answer ten (10) resources in each round
Announcements
2

3. References
The Recommended Textbook:
Hubbard, Garnett, Lewis & O’Brien, “Essentials of Economics”, Pearson
•Abbreviated as HGLO
•4
th
or 5
th
Editions are fine.
•For Lecture 2:
Recommended Reading – Chapter 3
3

4. Housing
Crisis in
Australia
What is happening?

5. 5
Source: Forbes

6. Housing Crisis in Australia
Housing is becoming increasingly unaffordable across Australia.
Simplest Measure of Housing Affordability: Proportion of Household Income spent on Housing Costs.
???????????????????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????
?????????????????????????????????????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????????
×100%
Housing Costs:
•Rental payments (for renters) or Mortgage Payments (for owners) + Rates Payments (e.g. water, council rates)
Housing Stress: •Households spending >30% of gross income on housing costs.
•More relevant for lower-income households (bottom 40% of households by income)
See Australian Institute of Health and Welfare’s (AIHW) guide to housing affordability
if interested.
The University of Queensland 6

7. 7
Source: The Guardian

8. Source: SGS Economics and Planning
Rental Affordability in Australia
8
Average rental household income

9. Source: SGS Economics and Planning
The situation is worse for low-income households
9
Minimum wage couple

10. Source: SGS Economics and Planning
The situation is worse for low-income households
10
Hospitality workers

11. •Recall that Housing Affordability=
Housing costs
Houshold income
×100%
–Actually should be termed Housing Unaffordability.
•Housing becomes less affordable when
Housing Costs increases faster than Household Income
•For instance, in Brisbane, between 2020 and 2023
–Average household income: ↑10% (SGS Economics & P
lanning, 2023)
–Median rent: ↑38% (Residential Tenancies Authority, 2023)
–House prices: ↑56% (PropTrack, 2023)
•So why has the price of housing increased so dramatically?
•But first: How are housing prices determined?
What happened?
11

12. Analysis
How can we make
sense of the
Housing Crisis?

13. Question
Where do Prices come from?
Why is the price of Brent crude oil ~USD77.52 per barrel (30/7/24)?
Why is the AUD-USD exchange rate AUD1.52 per USD (30/7/24)?
AUD: Australian Dollar; USD: US Dollar
Well, one simple answer: Prices are determined by “market forces”
Why then, what is a market?
The University of Queensland 13

14. What are Markets?
Markets can take many forms:
Single physical location: Tsukiji fish market in Tokyo
Online trading platform: Ebay, Amazon
Centralised markets: New York Stock Exchange
Decentralised markets: Over-the-counter (OTC) trading with network of dealers
(such as Pokemon TCG)
Differences between OTC and exchange trading (IMF
)
If only there is a generic definition of markets that can fit all these different forms…
The University of Queensland 14

15. Markets
Markets:
Consists of Buyers and Sellers
Of a particular Good or Service
And the arrangements by which they trade.
Typically we think of
Buyers as consumers of the goods or services
Sellers as suppliers or firms which produce the goods or services
Markets as the framework in which they interact and transact.
Lecture 1 ECON7012 15

16. Question
How are prices determined in markets?
By Sellers’ cost of production?
By Buyers’ willingness to pay (i.e. value of good to buyer)?
Or a combination of both?
The University of Queensland 16

17. Are Prices determined by Cost of
Production?
Seems reasonable:
After all, sellers will never charge a price below their cost of
production.
But prices often exceed costs of production.
For example:
Banksy’s artwork “Love is in the bin” sold for ~£18.5 million in 2021 (link
).
Doubt it cost Banksy that much to produce.
In fact, original intact work sold for ~£1 million
But price increased after being (partially) shredded.
Doubt it costs ~£17.5 million to shred
The University of Queensland 17
Source: Sotheby’s (Link)

18. Are Prices determined by Value to Buyers?
Seems reasonable:
After all, buyers will never be willing to pay a price
greater than what they think the good is worth.
But prices are often lower than buyers’ willingness to pay
(i.e. the value of the good to buyers)
For example:
Historically in some regions, price of salt was its weight in gold. (Interesting article
)
Salt is valuable not just as a condiment – it is also essential for health.
Value of salt to households probably hasn’t changed over time
The price of salt today is ~AUD2/kg (from Woolies)
Price of Gold ~AUD117,000/kg (30 July 2024, link)
Interesting Wiki article on Saharan salt caravans
The University of Queensland 18
Source: WikiCommons (Link)

19. How are prices determined in Markets?
Prices are determined by a combination of
Costs incurred by producers/suppliers
Value to consumers/buyers
To develop an understanding of how prices are determined in different market s
•Best to start with Perfectly Competitive Markets
Analytically the simplest type of market structure to examine.
Lecture 1 ECON7012 19

20. What are Perfectly Competitive Markets?
Perfectly Competitive Markets have the following features:
1.Many Buyers and Many Sellers
 Quantity transacted by each buyer and seller is “small” compared to overall market size.
 No buyer or seller able to unilaterally influence/determine the market price
 All buyers and sellers are price- takers: Have to accept the market price as it is
2.Homogeneous Goods
 Every seller sells an identical good or service as all other sellers.
 I.e. no differences in product characteristics or quality.
The University of Queensland 20

21. What are Perfectly Competitive Markets?
Perfectly Competitive Markets have the following features:
3.Perfect Information
All buyers and sellers perfectly informed on characteristics of the good – e.g. price and quality
4.Free Entry and Exit
Sellers are free to enter and leave the market
Example:
No patent or copyright issues preventing new market entrants
No cleanup costs preventing market incumbents from exiting market (e.g. for mines)
The University of Queensland 21

22. Examples of Perfectly Competitive Markets
Perfectly Competitive Markets: Conceptually an ideal market in which
Market forces - selfish decisions of market participants seeking to maximise their own individual economic surpluses
(e.g. profits for sellers)
Results in outcomes which maximises economic surplus for society as a whole.
Examples of Perfectly Competitive Markets
One example: Foreign Exchange Market (e.g. Market in which AUD is traded for USD)
Can you think of some others?
Is the market for milk in Australia a perfectly competitive one?
Hint: See ABC
News article in the Australian Senate Supermarket Inquiry
Lecture 1 ECON7012 22

23. Examples of Perfectly Competitive Markets
Not many markets in the real world are Perfectly Competitive.
Though some are “approximately” perfectly competitive.
But the concept of Perfect Competition is a useful benchmark or reference
Especially when considering less competitive market structures.
Or to get a sense of how “relatively” competitive markets might react to changes.
Is the Housing Market in Australia a perfectly competitive market?
In some senses, no. E.g. Houses available all differ in size, design, location etc.
But competitive in the sense that there are many homes available for sale, and many potential buyers
I.e. Home buyers and sellers are price takers – so using the competitive framework might be appropriate.
Lecture 1 ECON7012 23

24. 24
Housing
markets
There are two different but closely related housing markets:
•Market for residential properties
•Buying and selling of houses and land
•Market for residential rentals
•Buying and selling of the rights to use a residential
dwelling
How are they related?

25. Rent as the cost of housing
Suppose I own my home and have paid off my mortgage.
Does it mean the cost of living in my home is zero to me?
No. By living in my own home, I forgo the option of renting it out.
The opportunity cost of living in my own home is the rental income that I could have received
from renting my home out.
Actions involve choices, and choices lead to opportunities forgone
Thus, we will analyse the rental market
when we talk about the cost of housing
Since the rental market determines rents – which is the cost of housing, even for owner-occupiers.
25

26. How prices are determined
In perfectly competitive markets, Prices are determined by both
Supply (how much sellers are willing to sell , given prices they face)
Demand (how much buyers are willing to buy, given prices)
The University of Queensland 26
Quantity
Price
Supply
Demand
Equilibrium
Price

27. Demand and Quantity Demanded
Quantity Demanded:
The quantity of a good or service that consumers want to buy (over a given period of time)
Demand:
The relationship between Price and Quantity Demanded.
Can be expressed as: Tables, Equations or Graphs
Real World Observation:
As Price of a good Increases ????????????↑
Quantity Demanded by consumers for that Good falls (????????????
????????????↓)
Not surprising given that we live in a world in which Scarcity is a factor.
Takeaway: Law of Demand
There is a negative
relationship between Price and Quantity Demanded.
Lecture 1 ECON7012 27

28. Quantity demanded and demand
28
300
5000
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
500
3500
The quantity demanded
at the rent $300/week is
5000 quality-adjusted
units/week
The quantity demanded
at the rent $500/week is
3500 quality-adjusted
units/week
The relationship between price and quantity demanded is called demand.
Demand

29. 2 Related but Distinct Concepts
1.What do Economists mean by:
“Movement along the Demand Curve”
2.What do we mean by:
“A Shift (i.e. increase or decrease) in Demand”
Both are fundamental concepts required in understanding and applying
economic models.
Lecture 1 ECON7012 29

30. 1. Movement Along a Demand Curve
A movement along a demand curve occur s when
Consumers/buyers change how much they buy (change in Quantity Demanded)
In response to a change in price
Holding all other factors constant.
Graphically:
Literally a movement up or down the demand curve.
But the Demand curve itself stays unchanged.
Lecture 1 ECON7012 30

31. Law of demand
31
Price
($/unit)
Quantity
(unit/period)
????????????
high
Demand
????????????
low
????????????
high
????????????
low
A change in price
causes a movement
along a demand curve
Law of demand:
•When price increases, quantity demanded falls,
and vice versa.
•Demand curves are downward-sloping.
As the good becomes more expensive:
•For each buyer (intensive margin):
•Substitution effect:
The buyer substitute away to other relatively
cheaper products.
•Income effect:
The buyer can afford less of it
(for normal goods)

32. 2. Shift in Demand
A shift in Demand occurs if the relationship
between Prices and Quantities Demanded changes!
At the same Price, consumers now wish to buy a different quantity.
Due to changes in factors other than price, such as a change in tastes, incomes etc.
Changes in Price alone will only result in a movement along the demand curve.
Lecture 1 ECON7012 32

33. 2. Shift in Demand
Increase in Demand:
At the same Price, buyers increase their Quantities Demanded.
Rightward shift of the Demand Curve.
Equivalently, for the same Quantity Demanded,
buyers are willing to pay a higher price
Upward shift of the Demand Curve.
Since the Demand curve is downward sloping, rightwards and upwards shifts of the Demand Curve are equivalent in
direction.
Lecture 1 ECON7012 33

34. An “Increase” in Demand
5
2
3
1
4
6Price
($/kg)
Quantity
(kg)
0 8 16
D2D1
Lecture 2 ECON7012 34
Increase in Demand
=
Rightward Shift of Demand Curve
=
Increase in Quantity Demand at
the S
ame Price

35. A “Decrease” in Demand
5
2
3
1
4
16
6Price
($/kg)
Quantity
(kg)
0
D1
8
D2
Lecture 2 ECON7012 35
Decrease in Demand
=
Leftward Shift of Demand Curve
=
Decrease in Quantity Demand at
the S
ame Price

36. Factors that cause shifts in Demand
(See textbook for full list)
Shifts in demand occur when Quantity Demanded changes
due to changes in factors other than price
1.Change in Consumer Tastes or Preferences
2.Change in Population (number of buyers)
3.Change in expectations of future prices
Lecture 1 ECON7012 37

37. 1. Change in Consumer Tastes
Example:
Explain what happens to demand for gym membership when gym owners deliberately advertise the
“attractiveness” that comes with looking fit and healthy.
38
P1
1
2
Price
($/membership)
Quantity
(memberships)
Q1 Q2
D1
D2

38. 2. Change in Population or Number of
Buyers
Example: Explain what happens to the demand for bread in a small country
supermarket when a sudden influx of city tourist arrives unexpectedly.



39
Price
($/loaf bread)
Quantity
(loaves)
P1
Q1 Q2
D1
D2
1 2

39. 3. Change in Expectations of Future Prices
Example: Newspaper articles speculate that the 2032 Brisbane
Olympics will cause real estate prices to surge in the near future.



40
Price
Quantity
P1
Q1 Q2
D1
D2
1 2

40. Substitutes
2 goods are Substitutes (for one another) if they are used for the same or very similar purposes.
For example: Oranges and Apples are substitutes
As they are both healthy and tasty fruits
If oranges are too expensive, I’ll happily buy apples instead.
Other examples of pairs of substitutes
Coca Cola and Pepsi Cola
Uber rides and Taxi rides
Netflix and Stan
An increase in the price of a
substitute of good X will increase the demand for good X

41. Complements
2 goods are complements if they are usually used together.
For example:
Left shoes and Right shoes are complements.
A left Nike sneaker is useless without a matching right sneaker.
Other examples of complements
Cars and Petrol
Printers and Ink Cartridges
Sony PlayStation 5 and PS5 Games
An increase in the price of a
complement of good X will reduce the demand for good X

42. Normal Goods and Inferior Goods
Normal Goods
Goods for which consumer demand increases as household incomes increase.
Examples: Most goods and services
Inferior Goods
Goods for which consumer demand falls as incomes increase
Examples:
Single- ply toilet paper
Instant Noodles
McDonalds(?) – McD’s sales increased in 2008 (during the Global Financial Crisis)!
Lecture 1 ECON7012 43

43. McDonalds Meals as Inferior Goods?
Lecture 1 ECON7012 44
Source: Slate.com

44. Other Factors that cause shifts in Demand
4.Change in Price of a Substitute
5.Change in Price of a Complement
6.Change in Income for Normal Goods
7.Change in Income for Inferior Goods
Lecture 1 ECON7012 45

45. 4. Change price of a substitute.
Example: Explain what happens to the demand for Coke when the price of Pepsi goes up?






Coke
P
1
Q2Q1
D 1
D 2
1 2
Price
($/can)
Quantity
(cans)
Price
($/can)
Quantity
(cans)
Pepsi
1
P1
Q1
D 1
2
P2
Q2

46. 5. Change in price of a complement.
Example: Explain what happens to the demand for paper when computer ink price rises.





Paper
P
1
Q2 Q1
D2
D1
2 1
Price
($/refill)
Quantity
(refills)
Price
($/ream)
Quantity
(reams)
Ink
P 1
Q1
D1
1
2
P 2
Q2

47. 6. Change in income for a Normal Good
Example: Explain what happens to the demand for oysters when a consumer’s income rises
(assuming oysters are a normal good).
48
Price
($/kg)
Quantity
(kg)
P1
Q1 Q2
D1
D2
1 2

48. 7. Change in income for an Inferior Good
Example: Explain what happens to the demand for Instant Noodles when a consumer’s income rises
(assuming Instant Noodles are inferior goods).
49
Price
($/kg)
Quantity
(kg)
P1
Q2 Q1
D2
D1
2 1

49. 50
Are there any factors shifting the
demand for residential rental units
since 2020?
1.Change in housing preferences due
to COVID social-distancing
2.Return of migrants after COVID
travel ban
Demand for
residential rentals

50. Change in housing preferences
51
•Shift to work-from-home during
COVID
•People prefer more living space
during lockdown measures
•Average household size fell from
2.55 to 2.50
•Equivalent to a 2% increase
in the number of households
•Or 120,000 additional
households (ABS estimates)
•Or 70% of new houses
completed in 2022.
•Results in
Increase in housing demand
Source: ABC

51. Returns of migrants
52
•Net inbound migration surged
after international travel ban
lifted
•In the year ended March 2023,
Australia gained ~513,000
residents
•Pre-COVID level: 250,000
•Tasmania population as of
June 2023: 572,800
•More residents means higher
demand for housing

52. Demand for residential rental increased
53
Price
(Rent)
Quantity
Residential rental units in Australia
????????????
2020 ????????????
2023

53. Supply and Quantity Supplied
Quantity Supplied:
The quantity of a good or service that Suppliers want to produce and sell
(over a given period of time)
Supply:
The relationship between Price and Quantity Supplied.
Real World Observation:
As Price of a good Increases ????????????↑
Quantity Supplied by Producers for that Good Increases (????????????
????????????↑)
Takeaway: Law of Supply
There is a positive relationship between Price and Quantity Demanded.
Lecture 1 ECON7012 54

54. Quantity supplied and supply
55
300
2000
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
500
4500
The quantity supplied at the
rent $300/week is 2000
quality-adjusted units/week
The quantity supplied at
the rent $500/week is 4500
quality-adjusted units/week
The relationship between price and quantity supplied is called supply. Supply

55. 2 Related but Distinct Concepts
1.What do Economists mean by:
“Movement along the Supply Curve”
2.What do we mean by:
“A Shift (i.e. increase or decrease) in Supply”
Both are fundamental concepts required in understanding and applying
economic models.
Lecture 1 ECON7012 56

56. Law of supply
57
Price
($/unit)
Quantity
(unit/period)
????????????
high
????????????
high
????????????
low
????????????
low
A change in price
causes a movement
along a supply curve
Law of supply When price increases, quantity supplied rises, and vice versa. (Supply curves are upward-sloping.)
As the good becomes more expensive,
For each supplier (intensive margin):
•It is more profitable to sell a higher
quantity

57. 2. Shift in Supply
A shift in Supply occurs if the relationship between Price and Quantity Supplied changes.
Shifts in Supply occurs if factors other than price causes Quantity Supplied to change.
Increase (Decrease) in Supply:
Holding Price unchanged, Quantity Supplied Increases (Falls)
Firms willing to produce and sell more (less) at the same price
Rightward (Leftward) shift of the Supply Curve
Equivalently, Firms willing to accept a lower (requires a higher) price for the same quantity supplied.
Lecture 1 ECON7012 59

58. Increase in Supply
Lecture 1 ECON7012 60
Price
Quantity
????????????????????????????????????????????????????????????????????????
????????????
????????????
????????????
????????????
????????????,???????????? ????????????
????????????,????????????
????????????????????????????????????????????????????????????????????????
????????????

59. Decrease in Supply
Lecture 1 ECON7012 61
Price
Quantity
????????????????????????????????????????????????????????????????????????
????????????
????????????
????????????
????????????
????????????,???????????? ????????????
????????????,????????????
????????????????????????????????????????????????????????????????????????
????????????

60. Factors that cause Shifts in Supply
1.Change in Number of Suppliers in the Market
2.Change in Expectations of future selling price
3.Change in level of Input Costs
4.Shift of production to new products
5.Changes in prices of substitutes-in-production
6.Changes in prices of complements-in-production
Lecture 1 ECON7012 62

61. 1. Change in number of market suppliers
Example: Explain what happened to the market supply for financial planners after the stock
market crash in 2008.





63
Quantity
(planners)
Price
($/planner)
P1
Q2 Q1
S2
S1
12

62. 2. Changes in expectations of future price.
Example: House prices have been rising over recent months and homeowners expect prices to rise even
further in the coming six months.




64
1
Quantity
(houses)
Price
($/house)
P1
Q2 Q1
S2
S1
2

63. 3. Change in level of input costs.
Example: In the construction industry, small residential builders face increasing costs for
construction materials such as reinforcing steel, as well as higher wages.
65
Quantity
(builders)
Price
($/builder)
P1
Q2 Q1
S2
S1
12

64. Substitutes in production are goods that require the same (or similar) inputs
Examples:
•Liqueur and Hand sanitisers
•Long-term and Short -term (e.g., AirBnB) rentals
An increase in the price of a production substitute of good X will reduce the supply of good X
Complements in production are goods that are produced together
Examples:
•Chicken Thighs and Chicken wings
An increase in the price of a production complement
of good X will increase the supply of good X
Substitutes and complements in production
66
Related markets from suppliers’ point of view

65. 4. Change of price of Substitute- in-
Production
Example: Suppose Wheat and Barley are substitutes-in-production. What happens to the supply of
Barley if Wheat prices falls?
67
Price
Quantity
????????????????????????????????????????????????????????????????????????
????????????
????????????
????????????
????????????
????????????,???????????? ????????????
????????????,????????????
????????????????????????????????????????????????????????????????????????
????????????
Price
Quantity
????????????????????????????????????????????????????????????????????????
????????????
????????????
????????????
????????????
????????????,???????????? ????????????
????????????,????????????
???????????????????????????????????????????????????????????????????????? ???????????????????????????????????? ???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????? ???????????????????????????????????? ????????????????????????????????????????????????????????????
????????????
????????????

66. Are there any factors shifting the supply of residential rental units since 2020?
Thought experiment: Instead of renting out a property for a year, a landlord can
•Sell the property -- get the current price of the property
•Invest the proceeds to earn an interest
•Buy the property back a year later
–I.e. one year later, he’ll still have the property with either option to make the 2
options (renting out or sell property) truly comparable.
This will yield:
Supply for residential rentals
68
????????????current1+????????????−????????????
future
Interest rate
Current property price
Future property price

67. Opportunity cost of supplying rentals
69
Opportunity cost of renting out=????????????current1+????????????−????????????
future
The opportunity cost of supplying rentals is higher when:
•The current housing price is higher
•The interest rate is higher
•The future housing price is (expected to be) lower
And what happened between 2021 and 2023?

68. Disruption to Global Supply
Chains increased costs of
imported building materials
The University of Queensland 70
Source: McKinsey

69. Current Price of New Houses
•Production shutdowns in China due to COVID measures and Post-COVID shipping disruptions limited
supply of imported building material.
•Shortage of skilled workers also restricted supply
•Construction costs increased by 11.9% over 2022
See
Corelogic report
•Causing a decrease in supply of new houses in Australia
•Resulting in Higher Price of new Houses (some of which might be used for rentals)
????????????
????????????????????????????????????????????????????????????????????????????????????↑
•Why? (We’ll see later in this lecture)
The University of Queensland 71

70. The University of Queensland 72
(rba.gov.au)

71. Interest Rates increased in Australia (and
around the world)
The Reserve Bank of Australia (RBA) started to raise interest rates in 2022
RBA raised the cash rate 10 times between Apr 22 and Mar 23
In total increasing the cash rate from 0.1% to 3.6%
Cash rate is the benchmark interest rate in Australia (we’ll examine this in greater detail in a later lecture)
Interest Rates on Home Loans and other Deposits/Investments increased in response
Interest rates on Home Loans increased from ~2.6% in 2022 to >5%
Increase in Interest Rates - increase in input costs required for supplying rental properties
Higher mortgage rates results in higher explicit costs for landlords financed their investment properties with loans.
Higher interest rates imply higher opportunity cost of funds for landlords who had fully paid off their properties.
????????????↑
The University of Queensland 73

72. Opportunity cost of supplying rentals
74
↑Opportunity cost of renting out=↑????????????current1+↑????????????−????????????
future
Given higher Interest Rates and higher current price of Houses
•Costs of supplying rental properties increased for landlords
•Recall that an increase in input costs results in a fall in Supply.

73. Supply of residential rental decreased
75
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
????????????
2020
????????????
2023

74. What is “equilibrium”?
76
•In everyday language, equilibrium is a stable condition that, absent of external
shocks, the system remains unchanged.

75. The University of Queensland 77
What is “Equilibrium”?
Ball in
Equilibrium?
Ball in
Equilibrium?

76. •In competitive markets, a competitive equilibrium is the situation in which no
individuals want to change their buying or selling decision, given the market price
–The market would tend to move towards its equilibrium
–Once the market is in equilibrium, it will stay in its equilibrium state
(if there are no further external shocks)
–Concept of Market Equilibrium is useful:
Let's us predict where the market will end up.
•It is expressed by
•An equilibrium price (????????????
∗
)
•An equilibrium quantity (????????????
∗
) which
equals both the quantity demanded and quantity supplied at ????????????
∗
Equilibrium in economics
78

77. Equilibrium in a Perfectly Competitive
Market
The University of Queensland 79
Price
($/unit)
Quantity
(unit/period)
????????????
∗
????????????
∗
=????????????
????????????
∗=????????????
????????????
∗
Supply (S)
Demand (D)

78. Perfectly Competitive Market Equilibrium
Competitive Market equilibrium price (????????????
∗
) and quantity (????????????
∗
) found at the intersection of the
Demand and Supply Curves
Another term for a market equilibrium is market clearing:
Intuitively, all units offered for sale will end up being purchased
Leaving cleared shelves… so to speak.
The University of Queensland 80
Main Point
The Equilibrium Price (????????????
∗
) of a perfectly competitive market is the
Price at which Quantity Demanded (????????????
????????????
∗) is equal to the Quantity
Supplied (????????????
????????????
∗).
????????????
????????????
∗=????????????
????????????
∗ ???????????????????????? ????????????
∗

79. Question:
Why is the Equilibrium Price ????????????
∗
found at the intersection of the Demand and Supply curves?
And why is equilibrium found at where ????????????
????????????=????????????
?????????????
Consider what happens if the market price (????????????) is not the intersection of Demand and Supply.
The University of Queensland 81

80. Market Out of Equilibrium: ????????????
????????????>????????????
∗

The University of Queensland 82
The University of Queensland 82
Price
($/unit)
Quantity
(unit/period)
????????????
∗
Supply (S)
Demand (D)
????????????
1
????????????
????????????
????????????
????????????
???????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????????
????????????
????????????>????????????
????????????
•Excess Supply – Sellers cannot sell
as much as they would like.
•Each seller has incentive to lower
their price to attract buyers
•And same for their competitors…
•End result – all sellers lower their
price and the market price falls.
•????????????
???????????? cannot be an equilibrium
market price – because the
market price will not stay at ????????????
????????????…
????????????
2

81. Market Out of Equilibrium: ????????????
????????????<????????????
∗

The University of Queensland 83
The University of Queensland 83
Price
($/unit)
Quantity
(unit/period)
????????????
∗
Supply (S)
Demand (D)
????????????
1
????????????
???????????? ????????????
????????????
???????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????????
????????????
????????????>????????????
????????????
•Excess Demand – Buyers cannot
buy as much as they desire.
•Each buyer has incentive to offer
higher prices to sellers
•Same for all frustrated buyers.
•End result – all buyers bid higher
prices and the market price
increases.
•????????????
???????????? cannot be an equilibrium
market price – because the
market price will not stay at ????????????
????????????
????????????
2

82. Markets not in Equilibrium
If ????????????
????????????≠????????????
???????????? - the market is not in equilibrium
Excess Supply (????????????
????????????>????????????
????????????):
Sellers start offering lower prices
Market price starts falling
Market not in equilibrium
Remember – in an equilibrium, the market (e.g. price, quantity) will remain unchanged.
Excess Demand ( ????????????
????????????>????????????
????????????)
Buyers will offer higher prices
Market price will start to increase
Market not in equilibrium
The University of Queensland 84

83. Why Market Equilibrium at ????????????
∗
and ????????????
∗

The University of Queensland 85
Price
($/unit)
Quantity
(unit/period)
????????????
∗
????????????
????????????
Supply (S)
Demand (D)
=????????????
????????????=????????????
∗
•No Excess Demand
•Buyers have no incentive to
offer higher prices
•No Excess Supply
•Sellers have no incentive to
lower prices
•No reason for market price to change
away from ????????????
∗
•????????????
∗
is the equilibrium price
•Once the market price is at ????????????
∗
,
it will remain there
•In the absence of any shocks to
demand or supply
???????????????????????? ???????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????????
????????????
????????????=????????????
????????????
???????????????????????? ???????????????????????????????????????????????????????????????????????? ????????????????????????????????????????????????????????????????????????

84. •The main purpose of finding competitive equilibrium is not to calculate or forecast
the actual value of equilibrium price and quantity given a situation
•Demand and supply curves are not readily observable
•Demand and supply shift around all the time
•Rather, we would like to predict/explain how price and quantity change when
circumstances change
•Recall our initial question:
Why did residential rental price increase so much between 2020 and 2023?
Why care about equilibrium?
86

85. Residential rental market: Increase in demand
87
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
????????????
2020 ????????????
2023
Supply
When demand increases:
1.Demand curve shifts to the right
2.Equilibrium price increases
3.Equilibrium quantity increases
????????????
2020
????????????
2023
????????????
2020????????????
2023

86. Residential rental market: Decrease in supply
88
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
????????????
2020
????????????
2023
Demand
????????????
2020
????????????
2020
????????????
2023
????????????
2023
When supply decreases:
1.Supply curve shifts to the left
2.Equilibrium price increases
3.Equilibrium quantity decreases

87. Residential rental market: Combined effects
89
Price
(Rent, in $/week)
Quantity
(Quality-adjusted
rental services/week)
Residential rental units in Australia
????????????
2020
????????????
2023
????????????
2020
????????????
2023
????????????
2020
????????????
2020
????????????
2023
When demand increases AND supply decreases: 1.Demand curve shifts to the right, supply curve shifts to the left
2.Equilibrium price increases
3.Equilibrium quantity uncertain

88. 90
Effect on equilibrium quantity
Price
Quantity
Residential rental
units in Australia
Price
Quantity
Residential rental units in Australia
Increase in demand more than decrease in supply, equilibrium quantity goes up
Increase in demand less than decrease in supply, equilibrium quantity goes down
????????????
2020
????????????
2023
????????????
2020
????????????
2023
????????????
2020????????????
2023
????????????
2020
????????????
2023
????????????
2020
????????????
2023
????????????
2020????????????
2023

89. Source: PropTrack
… and this is what we see
91

90. Conclusion
What have we
learnt?

91. Image: Adobe Stock 94
Problem statement
•Why did the price of housing in Australia
increase so much from 2020 to 2023?
Economic tools employed
•Competitive market – Demand and Supply
Findings
•Demand for rental housing increased
•Supply of rental housing decreased
•Combined, they explain the rapid increase in
rents
Recap

92. Unanswered questions
Theoretical musings
•What if demand decreases, or supply increases? (left as an exercise)
Application of economics
•What was happening in the residential property market? (Tutorial 3)
Policy implications for the Housing Market
•How do we (government or other groups) help those in need? (Next lecture)
Application of the Demand & Supply Model in other competitive markets?
•For example: Why did petrol prices increase significantly in 2022?
95

93. Useful
Additional
Slides
The following slides are for your reference in
case:
•You are interested
•And/Or do not choose to scan through the
recommended textbook
•Might be useful for your final exam…
The University of Queensland 96

94. Increase in Demand
Example: Increase in income, impact on market for Luxury Cars (normal good)
The University of Queensland 97
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
????????????
????????????
0
∗
????????????
1
∗
????????????
0
∗
????????????
1
∗
Δ????????????
∗
>0
Δ????????????
∗
>0

95. Decrease in Demand
Example: Greater awareness of harmful effects of cigarettes
The University of Queensland 98
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
????????????
????????????
1
∗
????????????
0
∗
????????????
1
∗
????????????
0
∗
Δ????????????
∗
<0
Δ????????????
∗
<0

96. Increase in Supply
Example: Better technology lowering costs of production
The University of Queensland 99
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
0
∗
????????????
1
∗
????????????
0
∗
????????????
1
∗
Δ????????????
∗
<0
Δ????????????
∗
>0
????????????
????????????

97. Decrease in Supply
Example: Ukrainian War restricting global supply of Wheat
The University of Queensland 100
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
1
∗
????????????
0
∗
????????????
1
∗
????????????
0
∗
Δ????????????
∗
>0
Δ????????????
∗
>0
????????????
????????????

98. Changes in Demand and Supply: Summary
Demand Changes:
Increase in Demand
Demand curve shifts Right (↑????????????
???????????? at same price) and/or Up (↑???????????? at same ????????????
????????????)
Change to Market Equilibrium: ↑????????????
∗
and ↑????????????
∗
Decrease in Demand
Demand curve shifts Left (↓????????????
???????????? at same price) and/or Down (↓???????????? at same ????????????
????????????)
Change to Market Equilibrium: ↓????????????
∗
and ↓????????????
∗
The University of Queensland 101

99. Changes in Demand and Supply: Summary
Supply Changes:
Increase in Supply
Supply curve shifts Right (↑????????????
???????????? at same price) and/or Down (↓???????????? at same ????????????
????????????)
Change to Market Equilibrium: ↓????????????
∗
and ↑????????????
∗
Decrease in Supply
Supply curve shifts Left (↓????????????
???????????? at same price) and/or Up (↑???????????? at same ????????????
????????????)
Change to Market Equilibrium: ↑????????????
∗
and ↓????????????
∗
The University of Queensland 102

100. What if BOTH Demand and Supply change
Suppose Demand for Petrol increased
Due to lifting of COVID restrictions
When Supply of Petrol falls at the same time
Due to War in Ukraine and resulting sanctions on Russian energy exports
What would happen then?
Increase in Demand ⇒ ↑????????????
∗
and ↑????????????
∗
Decrease in Supply ⇒ ↑????????????
∗
and ↓????????????
∗
Equilibrium Price will increase ↑????????????
∗
Both increase Demand and decrease in supply imply higher eqm. price
What about Equilibrium Quantity?
Increase in Demand ⇒↑????????????
∗
but Decrease in Supply ⇒↓????????????
∗

Actual direction of change depends on relative size of changes to demand and supply…
The University of Queensland 103

101. Increase in Demand> Decrease in Supply
104
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
????????????
1
∗
????????????
0
∗
????????????
1
∗
????????????
0
∗
Δ????????????
∗
>0
Δ????????????
∗
>0
????????????
????????????
????????????
????????????
Δ????????????
∗
>0
Increase in ????????????
∗
due to higher Demand
outweighs fall in ????????????
∗
due to lower Supply

102. Increase in Demand< Decrease in Supply
105
Price
($/unit)
Quantity
(unit/period)
????????????
????????????
????????????
????????????
????????????
1
∗
????????????
0
∗
????????????
1
∗
????????????
0
∗
Δ????????????
∗
>0
Δ????????????
∗
<0
????????????
????????????
????????????
????????????
Δ????????????
∗
<0
Decrease in ????????????
∗
due to Lower Supply
outweighs
Increase in ????????????
∗
due to higher Demand

103. What if BOTH Demand and Supply change
Generally speaking:
Whenever both Demand and Supply change
Direction of change of one dimension (i.e. ????????????
∗
or ????????????
∗
) will be certain
But the direction of change of the other
dimension will be ambiguous
Determined by the relative size of the change in Demand vs Supply
You can verify this for yourself (or look at the next slide)
The University of Queensland 106

104. What if BOTH Demand and Supply change
Demand Increase
(↑????????????
∗
,↑????????????
∗
)
Demand Increase
(↓????????????
∗
,↓????????????
∗
)
Supply Increase
(↓????????????
∗
,↑????????????
∗
)
????????????
∗
:?
????????????
∗
:????????????????????????????????????????????????????????????????????????????????????????????????
????????????
∗
:????????????????????????????????????????????????????????????????????????????????????????????????
????????????
∗
:?
Supply Decrease
(↑????????????
∗
,↓????????????
∗
)
????????????
∗
:????????????????????????????????????????????????????????????????????????????????????????????????
????????????
∗
:?
????????????
∗
:?
????????????
∗
:????????????????????????????????????????????????????????????????????????????????????????????????
The University of Queensland 107

105. CRICOS 00025BCRICOS 00025B •TEQSAPRV12080
See you next week!
RiPPLE Round 1 starts next week