Sunday, July 5, 2009

Elasticity of Apartment Demand

Suppose that an effective rent ceiling has been established on the market for apartments in Marietta. What sort of disequilibrium would this cause?

Now, suppose the rent ceiling is removed. Evaluate the following statement:

"The removal of the rent ceiling will cause the total expenditures on the part of consumers to rise if the demand for apartments is price inelastic."


Greg Delemeester said...

Submitted on behalf of Rachel YuanQi:

Fewer people would like to rent their room since the price ceiling made them worse off, so the quantity supplied will fall. However, the quantity demanded will increase since people who want to rent a house can be better off. The price ceiling will cause a deadweight loss and there will be a shortage of houses in this market.

If the demand for apartments is price inelastic, then the price effect is stronger than the quantity effect. So when the price is increased, the total revenue will still increase. In other words, the total expenditures on the part of consumers will rise.

Megan Born said...

A rent ceiling would cause a reduction in the supply of apartments because the price would be too low for some suppliers to sell, so they would simply not sell. They would benefit more from not selling, and this creates a shortage of apartments for people who want them. With the price being a standard for all apartments there would be an increase in demand. The shortage is the disequilibrium in this market. If the demand for apartments is inelastic, the price effect (a price increase makes each unit sell at a higher price which raises revenue) is stronger than the quantity effect (a price increase means fewer apartments are sold which decreases revenue). Without the price ceiling suppliers can sell apartments at higher prices, meaning the price is inelastic, and allows the market to reach equilibrium. The inelastic price means that with the rise in price the total revenue will rise (or opposite if the price decreases the total revenue falls). The market will reach equilibrium because those who are willing to pay for the apartments of nicer quality will get them, and the amount of apartments supplied will equal the amount demanded. There will be no deadweight loss when the market reaches equilibrium because consumer and producer surplus are at their highest potential without harming the other. The removal of the rent ceiling will benefit the market, and increase total revenue and surplus within it.

Greg Delemeester said...

Hint: What happens to P and Q after the ceiling is removed? What impact does elasticity have on this result? (Be specific.)

Megan Born said...

The price ceiling would cause a shortage of apartments in Marietta. The price ceiling would be below the equilibrium price, so if the price ceiling is removed then the price of an apartment will increase and so will the quantity supplied. Both would increase til reaching equilibrium in the market. Because of the price increase the total revenue would increase meaning that the price elasticity of demand is inelastic, and the price effect is stronger than the quantity effect.