Suppose that In both Britain and the United States, the initial equilibrium price of housing Is $200,000. Britain has more severe restrictions on residential development In the short run Suppose the demand for housing increases by the same amount in the two countries.

a. Draw a set of supply and demand curves showing the effects on housing prices in the short run.

b. The price Increase Is larger in---------because that country has a relatively---------supply curve.

c. Suppose the long-run supply craves in the two countries have the same slope. Show the long-run effects of the increase in demand.

d. In the long run, Britain's price of housing is ----------- (higher/lower/the same).

APPLICATION

Restrictions on residential development make housing suppliers less responsive to changes In demand. As a result, the housing market is more prone to cycles of rising and falling prices. In a market with development controls, an increase in demand causes a large increase in price because the supply side of the market is hobbled in its response. The stricter the controls, the steeper the supply curve, and the larger the short-run increase in price. If the restrictions are eventually relaxed to accommodate higher demand, the supply side of the market responds, leading to an increase in quantity and a drop in prices. In Britain, development restrictions are more severe than they are in the United States, and this partly explains why Britain has more frequent housing booms and busts.