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Demand and Supply Concepts of Microeconomics

Discuss about the Economic Analysis of Counterfeit Goods.

The property prices in Australia have increased significantly since 2001, which in turn has generated huge debate among economists and policymakers. The house prices of this country have increased at a faster rate compare to incomes and rents. Some chief reasons behind this increase in property prices are credit availability due to financial deregulation, low rate of interest since 2008, limited supply of land and high population growth and so on. According to the Guardian, an Australian newspaper management, homeownership of this country is chiefly depended on consumer income, which in turn has increased the gap between rich and poor people (www.theguardian.com 2018). People with lower income have spent comparatively more prices or rents compare to one with higher income. In this country, most of the cities, like Sydney and Melbourne, have experienced higher amount of median house price compare to the median household income, which in turn has decreased the affordability of houses for Australian citizens. However, the housing prices is going to decreased in 2018 as the index of national median house price has decreased by 0.3% in December 2017 (Jericho 2018). According to the Sydney Morning Herald supply of home buildings has not affected the housing price to decrease further. The chief reason behind this price slowdown is tough banking regulations for receiving home loans. In this context, it can be mentioned that the government of Australia has supplied enough houses to meet the demand for this product in market. However, this excess supply of house does not follow the supply law and consequently the market price has remained at a higher level.

The Australian market of houses can be analyzed significantly with the help of demand and supply concepts of microeconomics, where elasticity of both these two factors can be considered as one of the important tools to measure the degree of changing demand or supply while price has changed by small proportion.

According to the demand law, price of a commodity and its quantity demanded has a negative relationship, that is, an increase in price of a particular product can decrease its quantity demanded while the opposite situation can also be occurred. Hence, the demand curve for a normal goods and a luxury one has always faced downward with negative slope to represent this inverse relation and can be described more precisely with the help of a demand curve (Dubé 2018). In this context, it needs to mention that under this law, other factors, which can influence the demand for a product except its own price, are considered as stable. Those factors are consumer’s income, tastes and preferences of the concerned person, price of relative commodities and so on. Hence, the demand for a commodity can also be changed at the given price level, if income of the consumer has changed, where a positive relationship can be seen under this situation, where the demand curve has shifted to upward or downward. This shift can be described accurately with the help of a suitable diagram, which is drawn below.

Application of Theory to Article

The above figure has depicted an inverse relationship of price for a particular product with its quantity demanded. In the above diagram, At P0 price level, the initial demand curve is D0 and its corresponding amount o f output is Q0. This curve has shifted to the right, that is, from D0 to D2, when income of the consumer has increased. Thus, at same price level the amount of quantity demanded has increased from Q0 to Q2, which has implied that at initial price, the consumer can afford more products to consume and consequently, the demand has increased.

On the other side, according to the supply law,  for a particular product, its price has represented a positive relationship with its quantity supplied, that is, supply of a product can be increased if its price has increased while the other situation can also be occurred (Cha 2016). Hence, the supply curve has possessed a positive slope that can be represented by an upward rising curve. This can be described accurately by analyzing a supply curve.

The figure 2 has represented an upward sloping supply curve to represent a positive slope. According to this diagram, price of a product has increased by P0 P1 unit, which in turn has increased the quantity supplied by Q0 Q1 unit.

In this context, it is essential to analyze the concept elasticity to measure the change in quantity demanded when income of consumers has changed by 1 percent. For normal products, the demand curve has become elastic, which means, a small change in income can influence the demand of that product significantly (Ragni and Baldin 2015). This can also be represented with the help of a diagram.

The above figure has represented an elastic demand curve that has represented a positive relationship between consumer’s income and its quantity demanded, where at P0 price the initial output demanded has remained at Q0. As consumer income has increased, they have started to demand for normal and luxury goods, for instance, as income has increased by P0 P1 unit, the quantity demanded has also increased by Q0 Q1 unite. However, for giffen goods, this relation has become opposite (Davies 2015). People want to substitute giffen goods with normal one when their income increases.


On the other side, the supply elasticity of a product has depended on its producers or sellers. Under this situation, a small change in price can influence the producers to supply more and the supply curve faced elastic by its nature (Diamond 2017). Moreover, for under the concept of inelastic supply curve, the producers cannot change its supply in the same direct in which its price change. This situation can be arrived due to limited resources.

Moreover, from these concepts of demand and supply an equilibrium price of product along with its equilibrium quantity of output can be obtained, where shifting of demand or supply curve can influence both price and output level to change accordingly.

According to the figure 4, Pe is the equilibrium price while Qe represents equilibrium amount of output. As income of consumers has increased, the demand curve has shifted from D0 to D1. Hence, at given supply level, this increase in demand for a product has increase its prices from Pe to P1 and the level of output demanded has also increased from Qe to Q1.

The concept of demand and supply is applicable in the field of housing market of Australia. The country has huge demand for houses as the number of population is increasing rapidly, where migration is one of the chief reasons (Bayer, McMillan, Murphy, and Timmins 2016). Moreover, the government of this country has also supplied various facilities like low rate of interest to lend money and that has helped to increase the demand for this product at a faster rate.

The above figure has represented the annual growth rate of population in Australia, where the yellow shaded area has measured the net overseas migration while the blue shaded area has indicated natural growth of population. It can be stated from the above diagram that the total number population in Australia has increased rapidly as the net overseas migration has increased significantly since 2008 (theguardian 2018). Hence, this increasing population has helped the demand of houses to increase further.

The above diagram has supported the concept that individual income has increased significantly in Australia, which in turn has increased the demand for houses. Hence, with more incomes, the citizen of Australia can now demand for houses more.


Hence, due to this population growth along with other economical factors like increase in income or reduction of interest rate has led the demand curve of households to shift rightward as shown in figure 1 (Jawad, Glant, and Millett 2017). This excess demand of houses has helped the price of this product to increase.

On the other side, excess supply of a product in market has influenced the price of it to decrease. This is true for all normal goods. However, this excess supply cannot influence the housing price to decrease in future. According to some statistical data, the government of this country has supplied sufficient amount o houses between 2001 and 2017 that can cover entire demand of that product (Andersen et al. 2018). However, for this market, the excess supply of any a product cannot reduce its price level. Hence, this economic theory is not completely applicable under this circumstance. Moreover, this situation can be described with the help of some economical concept.

The supply law has based chiefly on normal goods. Moreover, both demand and supply concepts are based on the assumption that each product has close substitutes. Thus, for those normal products, an individual wants to pay equal amount of money as the concerned person has received same level of utility (Yao 2014). However, according to some economists, housing does not fall under this category as different house has different features. Consequently, increasing supply of one types of house cannot reduce the demand for other types of this product and this practical factor has contradicted with law of supply

In addition to this, the concept of elasticity can also be incorporated here. Being a normal good, the quantity demanded for houses can be increased comparatively more while the income of a consumer has also increased. This is true for housing market, as people have demanded more houses due to their income increment (Higgs and Worthington 2014). However, presently this demand has decreased because of banking regulations, as it has restricted to lend the money to their customers for purchasing houses, which in turn has decreased the demand for those products.

The above diagram has supported the argument that has stated above. The housing price index has fluctuated drastically since 2014. It has remained at a higher level in 2017 while at the end of this year the value of this index has decreased significantly (Tradingeconomics.Com 2018). This housing price index of Australia is measured as the weighted average of price variation for residential properties, based on eight major cities of this country, which are Sydney, Brisbane, Melbourne and Perth and so one (Landvoigt, Piazzesi and Schneider 2015).

Here, the concept of supply elasticity has not influenced its market price. The government has intended to supply more houses while its price has increased significantly to reduce it and to increase the house affordability among citizens (Ferrero 2015). However, due to some external factors, the government cannot fulfill their plan though housing price has decreased due to decrease income of consumers, which in turn has decreased the price of houses by small amount.

Conclusion:

Hence, in conclusion it can be stated the entire housing market can be represented under the concept of demand and supply while excess demand among people has influenced the price of houses to increases. Initially it has been believed that the chief reason behind this increasing price its shortage of housing supply. However, the country has sufficient availability of houses, which in turn offset the entire market demand. However, by increasing the number houses, the government cannot control the situation; rather it can take some policies to control the market and to protect the self-interests of common people (Kuttner and Shim 2016). The government can revise its monetary and fiscal policies to control the market price of that product, for instance, by increasing the rate of interest for housing loans and increasing the tax structure. Moreover, they can provide houses to middle or lower income group people with cheaper rate as excess prices have become a burden for them especially. Hence, to regulate this situation, proper government regulation is essential where concept of demand and supply be implemented accurately.

References:

"Australia Disposable Personal Income | 1959-2018 | Data | Chart | Calendar". 2018. Tradingeconomics.Com. https://tradingeconomics.com/australia/disposable-personal-income.

"Australia House Price Index | 2002-2018 | Data | Chart | Calendar". 2018. Tradingeconomics.Com. https://tradingeconomics.com/australia/housing-index.

"Australia's Housing Market On Track To Cool In 2018 As Prices Fall In Capital Cities". 2018. The Guardian. https://www.theguardian.com/australia-news/2018/jan/02/australias-housing-market-on-track-to-cool-in-2018-as-prices-fall-in-capital-cities.

Andersen, Melanie J., Anna B. Williamson, Peter Fernando, Darryl Wright, and Sally Redman. "Housing conditions of urban households with Aboriginal children in NSW Australia: tenure type matters." BMC public health 18, no. 1 (2018): 70

Bayer, Patrick, Robert McMillan, Alvin Murphy, and Christopher Timmins. "A dynamic model of demand for houses and neighborhoods." Econometrica 84, no. 3 (2016): 893-942.

Cha, Deoksoo. "Investigative Report for Economists;“Prediction of Stock Market” and Functional “Invisible Hand” and “Law of Supply and Demand”." Theoretical Economics Letters 6, no. 06 (2016): 1299.

Davies, Jamie. "The Income Elasticity of Gambling in Australia and New Zealand." Deakin Papers on International Business Economics 8, no. 1 (2015).

Diamond, Rebecca. "Housing Supply Elasticity and Rent Extraction by State and Local Governments." American Economic Journal: Economic Policy 9, no. 1 (2017): 74-111.

Dubé, Jean-Pierre, Günter J. Hitsch, and Peter E. Rossi. "Income and wealth effects on private-label demand: evidence from the great recession." Marketing Science (2018).

Ferrero, Andrea. "House price booms, current account deficits, and low interest rates." Journal of Money, Credit and Banking 47, no. S1 (2015): 261-293.

Higgs, Helen, and Andrew C. Worthington. "Price and income elasticity of Australian retail finance: An autoregressive distributed lag (ARDL) approach." Australasian Accounting, Business and Finance Journal 8, no. 1 (2014): 114-126.

Jawad, Mohammed, John Tayu Lee, Stanton Glantz, and Christopher Millett. "Price elasticity of demand of non-cigarette tobacco products: a systematic review and meta-analysis." Tobacco control (2018): tobaccocontrol-2017.

Jericho, Greg. 2018. "Australian Housing Stuck Between A Rock And A Hard Place | Greg Jericho". The Guardian. https://www.theguardian.com/business/grogonomics/2018/mar/06/australian-housing-stuck-between-a-rock-and-a-hard-place..

Kuttner, Kenneth N., and Ilhyock Shim. "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies." Journal of Financial Stability 26 (2016): 31-44.

Landvoigt, Tim, Monika Piazzesi, and Martin Schneider. "The housing market (s) of San Diego." American Economic Review 105, no. 4 (2015): 1371-1407.

Ragni, Ludovic, and Claire Baldin. The Contribution of Pellegrino Rossi to the Law of Supply and Demand: an Attempt Interpretation. HAL, 2015.

Yao, Vincent W. "An economic analysis of counterfeit goods: The case of China." Business and Public Administration Studies 1, no. 1 (2014): 116.

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