Microeconmics 700 word help

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supply_and_demand_scenerio.pdf

Copies of Scenario's attached

Complete the Supply and Demand Simulation located on the student website.

Write 700 - 1,050-word paper of no more than summarizing the content. Address the following:

Identify two microeconomics and two macroeconomics principles or concepts from the simulation. Explain why you have categorized these principles or concepts as microeconomics or macroeconomics.

Identify at least one shift of the supply curve and one shift of the demand curve in the simulation. What causes the shifts?

• For each shift, analyze how it would affect the equilibrium price, quantity, and decision making.

• How may you apply what you learned about supply and demand from the simulation to your workplace or your understanding of a real-world product with which you are familiar?

• How do the concepts of microeconomics help you understand the factors that affect shifts in supply and demand on equilibrium prince and quantity?

• How do the concepts of macroeconomics help you understand the factors that affect shifts in supply and demand on the equilibrium price and quantity?

Explain how the price elasticity of demand affects a consumer's purchasing and the firm's pricing strategy as it relates to the simulation.

250 3.000

Vacancy rate (%)

Revenue (5 in million)

Surplus

Quantity demanded

Rental rate ($)

0 500 1.000 1,500 2.000 2.500

Number of Apartments

Demand Curve i Rental Rate

Economics for Business

'applying Supply and Demand Concepts

Scenario GoodLife currently has 2,000 two-bedroom apartments in its apartment complexes. The current vacancy rate for your two-bedroom apartments on temporary, month-to-month lease is 28 percent. Susan Hearst has recommended that the vacancy rate be brought down to about 15

percent. She has also asked you to maximize revenue.

You have to determine the monthly rental rate to ensure that more

two-bedroom apartments are occupied and that revenue is

maximized.

Hal Morgan, Regional Property Manager. GoodLife Management Though we are a monopoly in Atlantis and we can fix the market rental rate at our discretion, well have to lower the rental rate to increase the quantity demanded. We can consider lowering rental rates for all our two-bedroom apartments on temporary month-to- month lease.

1 500

1.250

1.000

750

500

R e

n ta l R

a te

( $)

Scenario nt-1M ifa t-IirrAntly h2c 4 non buri-hArirnnm onartrnanic in ite

You have selected the appropriate rental rate to reduce the vacancy rate to 15 percent. However, you have not maximized revenue. You

could have increased the revenue you are earning by lowering the rental rate and the vacancy rate.

The demand curve for any product is an imaginary line at a point in time. This tells you the quantities consumers would demand at various

prices of the product. As a decision maker, you typically do not have access to the demand curve.

However, what you do know is that for any product, more quantity is demanded at a lower price, other things remaining constant. As you have

seen, when you reduce the rental rate, more potential tenants are willing to rent apartments, leading to a lower vacancy rate.

As you lower the rental rate, revenue initially increases. reaches a maximum at a particular rental rate and quantity demanded. and then

decreases.

At a rental rate of $1,050 per month, you have succeeded in reducing the vacancy rate to the targeted level. At this rental rate, there were

tenants for 1.700 apartments, leading to a revenue of $1.79 million.

Also notice that though you have more apartments, not all of them are demanded at this rental rate and you have a surplus of 300 apartments.

In order to lease out all your apartments, you would have to reduce the rental rate.

Hal Morgan, Regional Property Manager, GoodLife Management It would not be profitable for us to lease out all the apartments at the current rental rate. That is because the cost of maintenance increases as we consider each additional apartment. We would be willing to lease out more apartments at higher rental rates as long as our maintenance costs are covered.

500 1,000 1,500

2,000 2.. 500

3.000

Number of Apartments

I I Demand Curve Rental Rate

=_-- Supply Curve

R en

ta l R

at e

($ )

2,000

1,750

1.500

1.250

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750

Rental rate (S)

Quantity supplied

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You have correctly identified the rental rate that you would charge if you were to lease out all your apartments.

Economics for Business I Applying Supply and Demand Concepts

Scenario t-/ You have 2,500 two-bedroom apartments available for lease on a temporary, month-to-month basis. The current rental rate for these apartments is $1,100. Susan has asked you to assess the possibility of leasing out all these apartments. Would you lease out all the apartments at the current rental rate?

If you were to lease out all 2,500 apartments, what would be the rental rate?

The supply curve for a product is an imaginary line at a point in time that tells you the quantities a supplier would provide at various prices of the product. As a decision-maker, you typically cannot access the supply curve.

For any supplier. a higher price is an incentive to supply more, other things remaining constant. Therefore, as the rental rate increases, the number of apartments that GoodLife is willing to lease increases. This could be because the production cost, or in the case of GoodLife, the maintenance cost, increases for each additional unit of the product. This increasing maintenance cost means that each additional unit of the product, (in your case, each additional apartment), would be supplied at a higher price.

The supply curve is, therefore upward sloping. As you increase the rental rate, the number of apartments supplied increases.

If you were to lease all your 2,500 apartments, the appropriate rental rate, as you have correctly identified, would be $1,550 per month.

1,000 2,000 3,000 4.000

Number of Apartments

5.000

2,000

1,750

1,500

1,250

1.000

750

500

250

0 0

R en

ta l R

a te

( $)

Surplus

Quantity supplied

Quantity demanded

Rental rate (S) Demand Curve i Rental Rate

A surplus in the market exerts a 2,500 downward pressure on price.

Quantity (units)

Demand Curve Supply Curve

!Equilibrium

Replay

Economics for Business I

Applying Supply and Demand Concepts

1' Scenario .1'

6

The Atlantis Housing Survey has provided statistics on the demand for two-bedroom rental apartments in Atlantis. For various monthly rental rates, the survey has estimated the number of two-bedroom apartments that will be demanded. On the basis of these estimates, the survey has found a persisting imbalance between quantity demanded and quantity supplied at the prevailing rental rate.

What monthly rental rate will you determine to remove this imbalance?

Hal Morgan, Regional Property Manager, GoodLife Management For us as suppliers, a high rental rate is an incentive to lease more apartments. However, a high rental rate also means lower quantity demanded of apartments. The survey has found that people who work in Atlantis stay in neighboring towns because of the relatively low rental rates there. I suggest we lower the rental rate to capture this potential demand.

You have identified the appropriate rental rate at which there is no imbalance between quantity demanded and quantity supplied.

The point at which quantity demanded equals quantity supplied is the equilibrium point. At equilibrium. the market is in a state of balance and there is no incentive for either suppliers or consumers to change their respective quantities. The rental rate corresponding to this point is called equilibrium rental rate, and the corresponding quantity is called equilibrium quantity.

At any rental rate above equilibrium, the quantity supplied is more than the quantity demanded and there is a surplus of apartments in the market. This means that GoodLife would supply more apartments than potential tenants would be willing to pay for. For potential tenants to increase their quantity demanded, the rental rate has to decline, because quantity demanded increases only when price decreases, other things remaining constant. As the rental rate decreases, quantity supplied of apartments also decreases, because you would have less incentive to supply at a lower price. The surplus becomes smaller and smaller as the rental rate decreases, leading to an increase in quantity demanded and a decrease in quantity supplied. This adjustment continues until equilibrium is attained.

At any rental rate below equilibrium, the quantity demanded is more than the quantity supplied, leading to a shortage of apartments in the market. That is, potential tenants would be willing to pay for more apartments than you would supply. To induce you to increase quantity supplied, the rental rate has to increase, because more is supplied only at a higher price, other things remaining constant. As the rental rate increases, the quantity demanded also decreases, because along a demand curve, an increase in price results in a decrease in quantity demanded. The shortage becomes smaller and smaller as the rental rate increases, resulting in a decrease in quantity demanded and an increase in quantity supplied. This adjustment continues until equilibrium is reached.

At a rental rate of $1,050 per month, you would lease 2,000 apartments, which is

equal to 2,000 apartments for which there are tenants at this rental rate.

There is equilibrium in the market, there is nc shortage or surplus, and therefore, there is no incentive for the rental rate or the number of apartments to change.

Scenario `-‘1

2,500

2,000

S

Supply Curve

Demand Shift

Demand Curve

Initial Equilibrium

co:: New Equilibrium

Economics for Business I Foloply C and

It has been two years. GoodLife now manages 3,000 two-bedroom apartments, and the prevailing monthly rental rate for temporary, month- to-month leases is $1,150. However. Lintech Inc's move to Atlantis has increased the population in the city. How will this affect demand for and supply of two-bedroom apartments for rent?

What monthly rental rate will you charge to reestablish the equilibrium between demand and supply?

Hal Morgan, Regional Property Manager, GoodLife Management Lintech's setting up office will increase demand for our apartments. I suggest we increase rental rates in response to the increase in demand. This rental rate will apply to all two-bedroom apartments on temporary, month-to-month leases when they come up for renewal, and not only to those that are currently vacant.

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0

Demand Shift

tl; Demand increases

Demand decreases

(-) Demand does not change

Supply Shift

C Supply increases

€'0 Supply decreases

C Supply does not change

Rental Rate Supply Curve

Su

Surplus

Quantity supplied

Quantity demanded

Rental rate ($)

0 500 1.000 1 500 2,000 2.500 3,000 3.500 4.000

Number of Apartments

i I Demand Curve-

You have correctly identified the impact of increased population on the demand for two-bedroom apartments on temporary, month-to-month lease. However, you have not identified the impact on the supply of these apartments correctly.

An increase in population increases the demand for rented apartments, but does not affect the supply of these apartments.

At any given rental rate, more people demand rented apartments. This results in an increase in demand. Thus, the demand curve shifts to the right.

The increase in demand means that quantity demanded is more than quantity supplied at the original equilibrium. and there is a temporary shortage in the market. That is, the number of apartments demanded is more than the number of apartments GoodLife is willing to lease at that rental rate. This causes the rental rate to increase. Thus, there is an upward movement along the supply curve. As the rental rate increases, quantity demanded decreases and quantity supplied increases, leading to a reduction in the shortage. This adjustment continues until equilibrium is reached between the new demand curve and the original supply curve.

At the new equilibrium, the rental rate is higher than before, and the number of apartments demanded and supplied has increased.

Replay

1,500

1.000

500 A shortage in the market exerts an

0 upward pressure on price.

Quantity (units)

R en

ta l R

at e

($ )

6,000 0 1,000 2,000 3,000 4.000 5,000

Demand Curve

Demand Shift

Supply Curve Rental Rate

Supply Shift

Economics for Business 1

Applying Supply and Demand Concepts

Scenario' GoodLife has 3.200 two-bedroom apartments available for lease, and charges a monthly rental rate of $1,450. However, an increase in incomes after the entry of Lintech has led people to prefer purchasing detached homes rather than renting apartments. How will this affect the demand for and supply of rental apartments?

What monthly rental rate will you charge so that the equilibrium between demand and supply is reestablished?

Hal Morgan, Regional Property Manager, GoodLife Management Demand fcr our apartments is bound to suffer. I think demand will continue to decrease as incomes increase, because people will prefer purchasing detached homes. I suggest we lower our rental rates to induce more people to rent apartments.

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1,750

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0

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You have correctly identified the impact of a change in preferences on the demand for and supply of two-bedroom rented apartments. You have also identified the appropriate equilibrium rental rate.

A change in preferences toward purchasing detached homes reduces the demand for two-bedroom apartments on temporary, month-to-month lease. but it has no impact on the supply of these apartments.

At any given rental rate, there are fewer potential tenants for your apartments. This results in a decrease in demand. Therefore, the demand curve shifts to the left.

This results in a temporary surplus situation at the original equilibrium rental rate because quantity demanded (on the new demand curve) is less than quantity supplied. Thus, at this rental rate, you would lease more apartments than potential tenants are willing to pay for. To induce potential tenants to lease more apartments. the rental rate has to decline. As the rental rate decreases, the quantity supplied also decreases, and there is a downward movement along the supply curve.

As the rental rate decreases. the surplus starts decreasing because quantity supplied decreases and quantity demanded increases. This adjustment continues until equilibrium between the new demand curve and the original supply curve is reached.

If you compare this equilibrium with the original equilibrium, you will see that both rental rate and equilibrium quantity have decreased.

At the new equilibrium, the rental rate, as you have identified correctly, ie ~ 1 X410 per month. At this rental rate yGni NOUN [email protected] 2:250 apartments, which is equal to thg 50a4ments that potential tenants are willing to pay for. Thus, there is no shortage or surplus in the market.

Replay

Number of Apartments

Demand Shift

C) Demand increases

Demand decreases

(-) Demand does not change

Supply Shift

(") Supply increases

(*) Supply decreases

(I) Supply does not change

Surplus

Quantity supplied

Quantity demanded

Rental rate ($)

A surplus in the market exerts a 2,500 downward pressure on price.

S

Demand Curve

Initial Equilibrium

New Equilibrium

Supply Curve

I 'Demand Shift

Hal Morgan, Regional Property Manager, GoodLife Management I suggest we reduce the rental rate for our remaining two- bedroom apartments on temporary, month-to-month lease. Demand for our apartments is already low. In this scenario. a low rental rate may provide potential tenants with an incentive to rent more apartments than detached homes.

1,000 2.000 3,000 4.000 5.000

Number of Apartments R

en ta

l R a

te (

$)

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0 0 6.000

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D

D1

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1.500 ' 8 a. 1.000

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Replay

S1

A shortage in the market exerts an

0 upward pressure on price.

Quantity (units)

i Demand Curve

Demand Shift

Initial Equilibrium

o Supply Curve

Supply Shift

iNew Equilibrium

Economics for Business I

Applying Supply and Demand Concepts

Scenario r Six months later. Hal's prediction of a further decrease in demand seems to be coming true. GoodLife has 2,800 two-bedroom apartments for lease on a temporary, month-to-month basis as about 400 apartments have been converted into condominiums for sale. Susan has also agreed to convert more two-bedroom apartments for rent into condos for sale. How will these two developments affect demand for and supply of rented two-bedroom apartments in future? What monthly rental rate will you charge so that the equilibrium between demand and supply is reestablished?

Demand Shift

C Demand increases (;) Demand decreases

C Demand does not change

Supply Shift

O Supply increases

0, Supply decreases O Supply does not change

Surplus

Quantity supplied

Quantity demanded

Rental rate ($)

Demand Curve

Demand Shift

Rental Rate

You have correctly identified the impact of change in preferences and change in expectations respectively on the demand for and supply of two-bedroom apartments on temporary, month-to-month lease. You have also identified the equilibrium rental rate correctly.

A change in preferences causes demand for two-bedroom rented apartments to decrease. Expecting a further decrease in demand, you have converted some apartments for rent to condominiums for sale, causing a decrease in supply.

At any given rental rate, there are fewer tenants for your apartments, and you also lease fewer apartments. This results in a decrease in the demand for and the supply of apartments. Therefore, both the demand curve and the supply curve shift to the left.

What happens to equilibrium rental rate and quantity now depends on which of the two effects is stronger: the decrease in demand or the decrease in supply. As you can see from the figure, the shift in supply is more than the,shift in demand. This could be because you have decreased supply in anticipation of a greater decrease in demand than has actually happened.

There is now a temporary shortage at the original equilibrium rental rate, because at this rental rate, quantity supplied on the new supply curve is less than quantity demanded on the new demand curve. That is, you would lease less number of apartments than potential tenants are willing to pay for. The rental rate has to increase to give you incentive to lease more apartments. As the rental rate increases, quantity demanded decreases, leading to a reduction in shortage. This adjustment continues until equilibrium between the new demand and supply curves is reached.

If you compare this equilibrium with the original equilibrium, you will see that the equilibrium quantity is less than before, but the equilibrium rental rate is higher than before. If the shift in demand had been more than the shift in supply, as opposed to what it is now, both equilibrium quantity and rental rate would have declined.

At the new equilibrium. as you have correctly identified, the rental rate is 81,475 per month. At this rental rate, you would lease 1,900 apartments, which equals the 1,900 apartments for which there are tenants. Thus, there is no shortage or surplus.

The concepts of supply and demand are fundamental to understanding many real-world occurrences.

Economics for Business I

Applying Supply and Demand Concepts

Demand and Supply The demand curve is downward sloping, and that quantity demanded increases as the price decreases—that is. as you move down the demand curve. GoodLife could increase the quantity demanded of its rented apartments only by reducing the rental rate.

The supply curve is upward sloping, and quantity supplied increases with an increase in price—that is, as you move up the supply curve. An increase in rental rate would cause GoodLife to lease out more apartments.

Equilibrium Quantity demanded equals quantity supplied only at the equilibrium point. At prices below equilibrium, the quantity demanded exceeds quantity supplied, and there is a shortage in the market. That is, consumers are willing to buy more than producers are willing to sell at this price. This causes price to increase. As price increases, quantity demanded decreases and quantity supplied increases. This adjustment process continues until equilibrium is attained. Similarly, at prices above equilibrium, quantity supplied exceeds quantity demanded, and there is a surplus in the market. Producers are willing to sell more than consumers are willing to buy, which exerts a downward pressure on price. The price continues to decrease until equilibrium is attained.

Shifts in demand and supply Demand and supply are not static; various factors cause them to increase or decrease. For instance, an increase in population caused demand for GoodLife's two-bedroom apartments to increase, but a change in preferences caused demand to decrease. Similarly, a change in expectations caused supply of two-bedroom apartments to decrease. These factors cause the demand or supply curve to shift to the right (increase) or left (decrease). A change in price, on the other hand. causes upward or downward movement along the same demand or supply curve.

Price ceiling You have also seen the effect of a price ceiling on the quantity demanded and quantity supplied of two-bedroom apartments. A price ceiling below equilibrium causes shortages because at this price, consumers' quantity demanded exceeds producers' quantity supplied. In such a scenario. non-price methods of rationing the limited supply of two-bedroom apartments may come into the picture.

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