Supply
and demand is
considered a basic economic concept, as well
as a vital part of a free market economy.
Supply is the amount of something, such as a
product or service, that a market has
available. Demand is the amount of the
product or service that buyers want to
purchase. The relationship between supply
and demand has a good deal of influence on
the price of goods and services.
Understanding the
law of demand
is an important part of
deciphering the relationship between supply
and demand. According to the law of demand,
price has a significant effect on demand.
Essentially, higher prices translate into
less demand for a product or service. When
the price of an item or service is high, an
individual must consider that buying the
item may prevent him from being able to
afford the purchase of another, more
valuable item. As such, the opportunity cost
of that item is too high and demand for it
may be low.
Principals of Economics in Real
Estate
The main participants in real
estate markets are:
Owner/User - These
people are both owners and
tenants. They purchase houses or
commercial property as an
investment and also to live in
or utilize as a business.
Owner - These people
are pure investors. They do not
consume the real estate that
they purchase. Typically they
rent out or lease the property
to someone else.
Renter - These people
are pure consumers.
Developers - These
people prepare raw land for
building which results in new
product for the market.
Renovators - These people
supply refurbished buildings to
the market.
Facilitators - This includes
banks, real estate brokers,
lawyers, and others that
facilitate the purchase and sale
of real estate.
The owner/user, owner, and
renter comprise the demand side of
the market, while the developers and
renovators comprise the supply side.
In order to apply simple supply and
demand analysis to real estate
markets a number of modifications
need to be made to standard
microeconomic assumptions and
procedures. In particular, the
unique characteristics of the real
estate market must be accommodated.
These characteristics include:
Real Estate Durability, Price of
Transaction Costs, Time Delays,
Immobility, Uniqueness of Real
Estate, Demand and Financing Rates.
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