Price Elasticity Of Demand Analysis

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Demand is the consumers’ willingness to buy goods or services at any given price whereas supply is the producers’ willingness to sell goods or services at any given price. Demand and supply framework can be used to understand the reason of price changes, for example, in the UK housing market. “According to Halifax, since 1983, the UK house prices have risen by 101%” (The Investor, 2012, para.7). Demand and supply explanation can be used to understand this case.
The population of the UK is increasing from 56.4 million in 1981 to 59.1 million in 2001 (Jefferies, 2005). This causes demand for houses to increase as the bigger population need more houses to accommodate, which contributes to the rising house prices. Next, incomes level could affect
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According to Ermisch et al. (1996) the PED of housing in the UK is -0.04, whereas the YED is 0.8.

Bii) PED of -0.04 indicates that the demand for housing is inelastic, which means any changes in house prices is likely to results in a small changes in the demand for housing. On the other hand, YED of 0.8 indicates that houses are normal goods which means as consumers’ income rises, more houses are demanded at any price (Riley, 2014). The diagrams below demonstrate the PED and YED of housing in the UK.

PED YED

House price Income D

Py Pb

Px
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“When housing regarded as a necessity and when there are few close substitutes available, we expect demand to be inelastic” (Riley, 2005, p.23). “Necessities by definition have to be bought whatever their price in order to stay alive. So an increase in the price of necessities will barely reduce the quantity demanded” (Anderton, 2008, p.71). This suggests that the changes in the house prices will have a little impact on the changes in the quantity demanded as housing is necessities to human. However, the more expensive houses could be regarded as luxury as it is people’s choice to buy expensive houses to increase their living standard, which would make demand to be elastic. Next, the availability of substitutes for new houses tend to increase price elasticity of demand. For instance, when there is more rental houses offered at affordable rates, the demand for new houses would be more elastic as people tend to rent a house which they are willing to pay monthly rather than buying a new houses which could be more expensive in terms of interest payment and

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