What market structure best represents the market for new homes in Australia?
The structure of the market is characterized by different features and may be defined by “market boundaries, differentiation, branding and the size of the market” (Búrca, Fletcher, & Brown 2004, p. 265). Australia is one of the countries where the overall cost of life of people is on a high level. People are satisfied with their lives and the housing conditions, which are offered to them. Statistical researchers of 1997 show that 88% of people were satisfied with their housing and 80% were satisfied with their neighbors (Environment Australia, Csiro 2002). There are several types of market structure, Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. The market of new houses in Australia is perfect competition, as it may be characterized by the following features: (1) the market is full of sellers and buyers, who are unable to influence the price of the product (houses), (2) the market can be easily entered and left, (3) the products which are offered are identical from the point of view of functioning and appropriation, (3) the information is complete and (4) the firms, which offer products, are independent and care about its profit. So, analyzing the given information and the types of markets it can be easily concluded that the market structure of the new houses in Australia is perfect competition.
Define the supply elasticity of housing. What does “housing supply is quite elastic” mean and how does this elasticity translate for the marginal cost curve of the representative firm in this industry?
The supply elasticity of housing is the ability of the housing supply to react to demand, the construction price, and other facilities. In other words, the housing supply is flexible, and in reference to different factors, which are rather unstable in the modern world crisis, the housing supply may change, as well as the price of housing (Muth & Goodman 2002, p. 18). The phrase “housing supply is quite elastic” (Glaeser & Gyourko 2008, p. 1) means that a lot of factors influence the housing supply on the market. Moreover, the article shows that the price of housing becomes lower and lower, the bank system is the place which should be trusted in the appeared position, and the housing price becomes closely interconnected with the construction costs of the buildings. Considering the situation with the elasticity of the housing supply and how this elasticity is translated for the marginal cost curve of the representative firm in this industry, it can be mentioned that the supply costs depend on the physical costs of the building construction, then the costs of the firm, which provides the works, and the firm which then supplies the data to developers. 20% of the housing price is the total value of the housing and 17% is the “gross profit margin for the developer” (Glaeser & Gyourko 2008, p. 3). Considering the dependence of the price, which is relative to costs, and the total housing permits on the example of Las Vegas, it is possible to make a conclusion that housing prices followed the costs of building construction closely till 2002. The discussed period is characterized by the close connection between supply costs and prices, which is expected. The construction price rise in the 1980s made the relative rise of the housing prices (taking into account the elasticity of housing supply). The situation after 2002 has changed absolutely. The unreasonable rise of prices till 2006, and a sudden fall (for 30%) in the further period, but still this situation did not balance the housing price with the construction costs (Glaeser & Gyourko 2008).
How elastic is the supply of new homes in Australia?
To find out the rate of the elasticity of the supply is rather easy, the main economical laws just should be followed. The make the necessary calculations, the formula should be used
0.53 is the average change of price for the year in Australia.
0.8 is the number of houses supplied to the market of housing in Australia.
The activities were taken from the Australian Bureau of Statistics (2009), where the average % of the change in the quantity of houses supply and the price change was offered. The percentage of the change of the housing supply was calculated by the Bureau of Statistics and no other calculations had to be provided. The housing price was not offered, instead, the prices in the biggest cities were available. The table with the information about the percentage change in the biggest cities of Australia is offered in the table.
The last column is the sphere of our interest (the percentage change from 2008 till 2009). Calculating the average number, it will be the average percentage change per year in the country.
Knowing that if the elasticity < 1, so the supply is not elastic, and in the elasticity > 1, so the supply s elastic. Taking into account the number which was calculated (1.51), it may be surely said that the supply of new homes in Australia is elastic.
Some people argue that the market for new homes is best described as “monopolistic competition”. Explain what monopolistic competition and perfect competition have in common. Explain what makes the monopolistic competition different from perfect competition.
Before researching the question about the differences between monopolistic competition and perfect competition, it is significant to explain the definitions of these notions. Perfect competition in the market is considered to be an ideal market structure, which has such characteristics as (1) a lot of buyers and sellers, who cannot influence the market price of the products, (2) it is easy to enter and leave the market with perfect competition, (3) the products, offered on the market are similar, (4) complete information, (5) the market participants are independent firms, which aim is to maximize the profit from selling, what is almost impossible to reach. Examples of perfect competitive products are rice, eggs, wheat, and other relative goods (Mercado, Welford, & Prescott 2001).
Monopolistic competition (or imperfect competition) has an absolutely different nature. A monopolistic competition market offers similar, but not identical products (one of the main examples of monopolistic competition market products are electronic goods). The difference of the products on the discussed competition market is applied by the price, the brand mark, quality of the product, and its labeling, advertising, and promotion of the product. The monopolistic competitive market is rather difficult to enter as the firms, which are present on these markets, cannot afford entering to the strange mark which may take the market segment of the present company and reduce its sales (Mercado, Welford, & Prescott 2001).
The main difference between these two mentioned types of competition is that perfect competition supposes the offer of identical products on the market, while monopolistic competition offers similar products. The entrance to the monopolistic market is rather difficult, while to enter the perfect competition market is easy and free. The reduction of the price by one company (with the aim to attract customers) in the monopolistic competitive market will not lead to the reduction of the selling of other companies as the products have different nature. The reduction of the price on the perfect competition market will demand for other sellers the same step, while the change of the price policy of any company on the monopolistic market will not give any significant changes in the price of other companies (Baumol & Blinder 2008).
Assume the market for new homes is perfectly competitive. Starting from the long run equilibrium where the price is equal to the minimum of ATC, represent and explain the impact of a rise in demand on the equilibrium price, firms profitability and the number of firms in the market, in the short run and in the long run.
As it was mentioned above there is a great difference between perfect and monopolistic competition markets. Taking as the model that he new homes market appears in the perfect competition market, the short run and long run equilibrium activities will be different. So, the price in short run equilibrium in the perfect competitive market is the only center of consideration. Moreover, the firm in the short run with the noted peculiarities will be price-taker (which price is offered, the same must be used), the price is equal to the marginal revenue, which is in its turn equal to average revenue (the dependence is obvious MR = AR = P). Furthermore, the short run marginal cost will be equal to marginal revenue what will result the maximization of the profit (Nellis & Parker 2008).
Considering the long run, taking into account the short run equilibrium, it is notable that the maximization of the price will come to the highest point and the supernormal profit may (and surely will) attract the new participants on the market. In the conditions that the market demand is the same, the newcomers to the market, producing their goods, will saturate the market in such a way and such an activity that the price will fall (the result of the fact that the market has its measures). The price will continue to fall till the supernormal profit will be reduced to minimum. In this case the long run equilibrium will take place (Ison & Wall 2007).
So, the given analysis of the short run and long run equilibrium make it possible to provide the conclusion that the number of firms on the market in the long run will increase. The increase of these firms will be provoked by the profit rise in the short rum equilibrium, while the profitability will reach its higher condition in the short run and the price for customers will also be higher, as well as in the long run period all mentioned activities will be reduced to the usual condition.
To understand the short run and long run periods better, the diagrams can be offered. The diagrams are shown below, where MC – marginal cost, ATC – average total cost, AVC – average variable cost, AFC – average fixed cost, LRAC – long run average cost and SRAC – short run average cost. The diagrams easily represent all, what was told above, but in the more effective visual form.
Summarize the key points of the article and the reasons put forward against housing price support. Explain in particular why this creates inefficiency.
The key points of the article “The Case against Housing Price Supports” by Edward Glaeser & Joseph Gyourko is that the modern situation on the market of housing is rather difficult and there are two points of view about the situation, whether to make the government to interfere in the price politics or to stay behind and allow for the prices on housing to reduce. The prices for housing became lower and this meets the government desire to make the houses more affordable to people. The current situation is what the government wanted to provide as the social reform. The bank system can do nothing with the prices and stays behind. The problem appears between buyers and sellers in the current sphere as the interests of one are supported, while the interests of others are violated. It can be easily explained as the sellers want their product been sold on the highest price or at least by the price which they bought it, as well as buyers are satisfied with the price policy as they can afford themselves better quality of the product by the same price (Glaeser & Gyourko 2008).
The situation was rather optimistic when the price on housing was lowering but did not reach its critical level. The inefficiency was achieved when the price lowered behind the steady state level. Today the prices on housing are so low that government should interfere and to return the prices into its long run steady state level. Such measure is not just recommended but must be provided in order not to create biggest problems. It is surely impossible to predict the prices on hosing in the long run, but it is possible to make up the reference to the past and top take the relative period (Glaeser & Gyourko 2008).
The other reason, which creates inefficiency, is that the drop of price is quick and abrupt. The slight reduce of the price is much better than sharp, so the government should work in this direction. The slight drop of the price may make people to get used to the situation, to create some plans, while hard drop does not give such opportunity and may create negative externalities for society. The banking system may help in the decision of this problem, but first of all, this banking system should be revised and corrected, with the aim of correct functioning during such complicated period (Glaeser & Gyourko 2008).
Do some research on other policies, not necessarily in Australia, aimed at subsidizing durable goods consumption. Using that research and your answer from question 9, explain how the market for new homes is going to be impacted when the first home buyer grant program ends.
Being economically aware, people become interested in the investments which can make the profit to the person and be durable, as in the time of current crisis, it becomes rather dangerous to provide investments in the unreliable business. Having researched the information from the point of view of the durable goods consumption subsidizing, it became understandable that there are things which remain to be reliable and durable for subsiding in any time. The research showed that the most durable for subsidizing remains housing, moreover, the China government offers the effective subsidies to the families who want to sell their old housing or car with the aim to buy the newer one. The strategy is provided with the aim to support the citizens’ consumption and to stimulate other people to invest their money into durable affair (Xinhua 2009).
Supporting the researched information by the short run and long run equilibrium, it may be stated the new housing buying is a durable investment of money, as the price, even in the case of the short instability (rise or fall), nevertheless will return to its stable condition. The lowering of the price, as well as the high price, is the temporal condition and it may be returned to its initial price. So, people may buy new houses and be calm for their money, as well as banks or government, who offers the subsidies, may be calm for the money they offer to the citizens, as new housing investment is considered to be one of the most durable good for consumption.
The privileges of such step are rather obvious. First, the old, spoiled in some way cars will not fulfill the streets of the China and the cases of incidents may be reduced to minimum (especially those where the car qualities or problems were the main cases of the incident). The visual improvement of people’s cost of live will make the total average activity in the country higher, what will give the country the opportunity to raise it level on the international stage. This program is one of the first in the world which helps people to improve their living conditions during the difficult time and without much money to be spent on it. In other words, people with different incomes can afford themselves the improvement even in such a difficult condition in the world, and in the country.
Education subsidy can take the form of vouchers. Explain why, from an economic growth and efficiency point of view, education subsidies are different from home or car subsidies.
Before considering the difference between education, house, and car subsidies, the main features of every of them should be discussed. The car subsidies are the most frequent type of subsidy which occurs in modern world. Modern people cannot imagine their lives without cars. The change of the style of manufacturing in the car industry leads to the change of the subsidy scheme. The car subsidies costs conceal the costs on gasoline and driving, “the government funding of infrastructure and services, research and development support, tax breaks, foreign tax credits, depreciation of machinery and equipment” (Myers & Kent 2001, p. 99). At the same time the car subsidies allow people to buy more cars, that lead to the increase of environmental problems and the blocks on the roads. Moreover, the problem of the environmental pollution is very significant in some countries, what leads to the extra costs from the side of the government, as the measures to the environment protection should be provided.
The house subsidy is the subsidy which is given to the citizens, coming out of the taxes which are imposed on the square of the living place. The higher the storey of the subsided flat, the higher is the price which the bank/government may offer. The subsidy politics also includes the limitation of the time to which the money may be taken. The funds are provided in the case of the time violation and lateness with the payment (Towers 2000).
The subsidy for the housing is the type of subsidy, which does not cause any positive economical movements, what is impossible to say about the subsidy to the education. Education is one of the types of subsidy which is aimed to provide the further return in the economy of the country from the point of view of the knowledge, which is going to be provided in the work of the country.
The cost of the higher education subsidy depends on the level of the education cost. Moreover, the educational subsidy brings the profit not only to one person, but also to the whole society, and it may be told that the financing which is spend on the education subsidy is going to return to the society by the profit which the educated person will bring together with the knowledge he/she has possessed at the University. The disadvantage of the educational subsidy is that the student with the low family income receives the low subsidy from the government, while the family with the average income can afford to receive the higher subsidy financing (Smart 2007). So, education subsidy is the most beneficial type of subsidies from the economical point of view.
Reference List
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BĂşrca, SD, Fletcher, R, & Brown, L 2004, International marketing: an SME perspective, Pearson Education, Oxford.
Environment Australia, Csiro 2002, Australia, state of the environment 2001: theme reports, CSIRO Publishing, Victoria.
Glaeser, E & Gyourko, J 2008, The Case against Housing Price Supports, Economists’ Voice, vol. 5, no. 6.Muth, RF & Goodman, AC 2002, The economics of housing markets, Routledge, Oxford.
Ison, S & Wall, S 2007, Economics, Pearson Education, Oxford.
Mercado, S, Welford, R, & Prescott, K 2001, European business, Pearson Education, Oxford.
Myers, N & Kent, J 2001, Perverse subsidies: how tax dollars can undercut the environment and the economy, Island Press, Chicago.
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Smart, JC 2007, Higher Education: Handbook of Theory and Research, Springer, New York.
Towers, G 2000, Shelter is not enough: transforming multi-storey housing, The Policy Press, Bristol.
Xinhua 2009, China to subsidize old-for-new consumption, China Daily. Web.