Case Study 1: Anatomy of price and quantity changes [30 marks] In Figure 1 you can...

Transcribed Image Text:

Case Study 1: Anatomy of price and quantity changes [30 marks] In Figure 1 you can see data for the UK housing industry during the period 1990 to 2017. Figure 1: UK house market 1985-2017 (2015-100) 140 120 100- 00 40 20 UK house market 1965-2017 (2015-100) Source Nationwide and ONS Suppose all the observations represent equilibrium prices and quantities in each year. Thus, each point reflects the intersection of the demand and supply curve that year. The data in the graph show a negative relationship between the price of houses and the quantity of new private houses built in the 90s. As quantity of new houses increases (decreases), the house price tends to decrease (increases). During the 90s it seems that shifts in the supply of houses were more common than shifts in demand and this explains the pattern we see. The picture changes after 2003 where we see a positive relationship between the price and quantity. It was demand for houses that must have been shifting after 2003. After 2007, the house prices collapsed, and the Great Recession happened. The relationship between prices and quantities seems again positive. Questions 1. Using a visual inspection of the data on the price and quantities for houses in the UK, what basic deductions can you make about the UK housing market generally? [10 marks] 2. Provide a commentary that might explain the underlying factors driving the two profiles of prices and quantities over time. [10 marks] 3. What advice would you give to the government if there are episodes where the market for housing is not performing normally, for example where both quantity and price are co-moving? [10 marks] Case Study 1: Anatomy of price and quantity changes [30 marks] In Figure 1 you can see data for the UK housing industry during the period 1990 to 2017. Figure 1: UK house market 1985-2017 (2015-100) 140 120 100- 00 40 20 UK house market 1965-2017 (2015-100) Source Nationwide and ONS Suppose all the observations represent equilibrium prices and quantities in each year. Thus, each point reflects the intersection of the demand and supply curve that year. The data in the graph show a negative relationship between the price of houses and the quantity of new private houses built in the 90s. As quantity of new houses increases (decreases), the house price tends to decrease (increases). During the 90s it seems that shifts in the supply of houses were more common than shifts in demand and this explains the pattern we see. The picture changes after 2003 where we see a positive relationship between the price and quantity. It was demand for houses that must have been shifting after 2003. After 2007, the house prices collapsed, and the Great Recession happened. The relationship between prices and quantities seems again positive. Questions 1. Using a visual inspection of the data on the price and quantities for houses in the UK, what basic deductions can you make about the UK housing market generally? [10 marks] 2. Provide a commentary that might explain the underlying factors driving the two profiles of prices and quantities over time. [10 marks] 3. What advice would you give to the government if there are episodes where the market for housing is not performing normally, for example where both quantity and price are co-moving? [10 marks]

Answer rating: 100% (QA)

1 Using a visual inspection of ... View the full answer