Question

3 Assume that you are about to buy an apartment (flat) in Mersin, and noticed that 3 bedroom apartments are offered at 250,000TL, and estimated quantity of flats purchased in the city is about 320 units. Firstly draw the market equilibrium level. Secondly it is announced that the government decided to increase taxes to companies constructing buildings in order to protect the environment. Thirdly government increased salary payments (which increased their income) of consumers who may purchase apartments. Fourthly change in demand is smaller than change in supply. Then explain how much price and quantity are likely to change in demand and supply on the figure. Finally show and explain new equilibrium on the figure.

Answer 1

Ans.

Price S U P" 250000 Q' 320 Quantity

a) An increase in taxes on construction leads to an increase in cost of production which leads to decrease in supply of apartments. This shifts the supply curve of apartments leftwards from S to S' creating a shortage of apartments in the market. This increases the price of apartments but decreases the equilibrium quantity of apartments.

b) Increase in income of people increases the demand for apartments shifting the demand curve rightwards from D to D'. This creates a situation of excess demand for apartments in the market leading to increase in price and equilibrium quantity of apartments also increases.

c) As the change in demand is smaller than the change in supply, so, decrease in equilibrium quantity of apartments will be greater than the increase in equilibrium quantity of apartments but price will unambiguously increase. Thus, equilibrium quantity will fall.

So, at new equilibrium, quantity of apartments will decrease from 320 units to Q' and price increases from 250000 TL to P'.

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