Economics for Business

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Analyzing Supply and Demand Dynamics in the UK Domestic Rental Market Student’s Name: Institution Affiliation: Course Name: Instructor’s Name: Date:

Introduction Economics rests on basic premises of demand and supply which form the bedrock determinants of market dynamics. It is critical to understand how different things affect changes in supply and demand and its effect on prices and volumes into an economy’. Firstly, elasticity theory should be appreciated to understand market responsiveness in its entirety. This report delves into a detailed analysis of the supply and demand dynamics and the current domestic UK rental market specificity for a defined context. Our aim is to connect what is being taught in our economics lectures about economic theory concerning the dynamic market with real-life events and happenings. This is achieved by drawing supply and demand diagrams that illustrate the fundamental nature of this economics. Specifically, this report formulates and describes nine schemes that illustrate various situations and hypotheses related to UK home rental market. As such, these diagrams will be important visual tools. The nine diagrams include: 1. Basic supply and demand equilibrium. 2. Supply shifting to the right. 3. Supply shifting to the left. 4. Demand shifting to the right. 5. Demand shifting to the left. 6. Elastic demand. 7. Inelastic demand. 8. Elastic supply. 9. Inelastic supply.

Careful reasoning is followed in preparation of every diagram which will have a description of the basics of economics and their impacts on the rental market in the domestic market of London. This report too rests upon current happenings that have taken place in the UK rental market over time. For the purpose of an all-encompassing analysis, we shall make use of the recent incidents and trends, coupling them with the economic theory developed in this report. Finally, this report strives to offer an integrated understanding of the supply-demand fundamentals underpinning the UK domestic rental market.

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Basic Supply and Demand Equilibrium The graph below shows the connection between the quantity of rental units and the rental price. Equilibrium is where the supply curves meet the demand curve. This is the point where the required rental units are equivalent to the available units for rent at a certain cost. To understand balance in the UK domestic lettings market, it is necessary to recognize two fundamental principles of economy. According to the law of demand, when rents fall, rent demand will boom, while on the other hand, if the rent goes up, demand for an apartment will decline. However, the Law of Supply postulates that as rental prices increase, it encourages more landlords to offer for rent more property units. When the prices fall, the supply goes down as well. On our diagram this marks a very fine balance, where rent supply metamorphoses with demand and equals itself tenants in rental supplied. Such deviations may cause a glut in the number of rental units, leading to a drop in rentals and a price decrease.

Diagram 1: Basic Supply and Demand Equilibrium Shifts in Supply and Demand In this section, we explore the dynamics of shifts in supply and demand within the UK domestic rental market through the use of diagrams and comprehensive explanations. We commence our analysis by presenting four critical scenarios visualized through diagrams. Diagram 2 illustrates the concept of supply shifting to the right, indicating an increase in the quantity of rental units supplied.

Diagram 2: Supply shifting to the Right While Diagram 3 represents supply shifting left and signifies a decrease in quantity supplied, the next diagram showcases a shift to the right, opposed to this. That symbolizes an upsurge in rental unit demand. The demand isn’t always up though. Diagram 5 shows it shifting left to signify a decline in demand.

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Diagram 3: Supply shifting to the left

Diagram 4: Demand shifting to the right

Diagram 5: Demand shifting to the Left Elasticity In charts and detailed explanations, this section will delve into elasticity and how it’s relevant to the UK domestic rental market. Elasticity, a pivotal concept in economics, will be explained through four diagrams.

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Diagram 6: Elastic Demand Diagram 6 illustrates the notion of elastic demand, where tenants are highly responsive to price changes. Diagram 7: Inelastic Demand

Conversely, Diagram 7 portrays inelastic demand, indicating that rental unit demand remains relatively unaffected by price fluctuations. Diagram 8: Elastic Supply Moving to the supply side, Diagram 8 demonstrates elastic supply, showing that landlords are responsive to changes in rental prices.

Diagram 9: Inelastic Supply Lastly, Diagram 9 represents inelastic supply, revealing that rental unit supply remains largely unchanged in response to price shifts.

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Analysis of Recent Occurrences Some interesting things have happened in the UK domestic rental market over the last few years, which are bound up with the supply-demand theory and concepts of elasticity discussed above. To understand the significance of these events, it becomes necessary to analyze them in some detail herewith. The rise on modular construction methods in recent times has become one key trend in he UK home rental market (Bertram et al., 2019). The increase in supply of for-rental units resulted from modular construction’s cost effectiveness as well as faster deployment method compared to others. This is consistent with the supply curve shown in Chart 2 which suggests that an increase in supply may possibly result into a drop in rent prices leading to expansion of demand. Nevertheless, the extent of price and quantity responsiveness is determined by the elasticity of demand and supply according to Cavalleri et al. (2019). On the other hand, the UK domestic rental market has experienced an unprecedented turnout resulting from the emergence of the COVID-19 pandemic. Nanda et al. (2021) highlight that as a result of lockdown and working remotely; ecommerce and digitalization have accelerated. The change in this consumer behavior resulted into a rise in demand for rental properties having home offices, thus, causing an upwards trend of this kind illustrated by diagram four. Such a change may lead to increased rentals’ price and quantum – dependent solely on the elasticity of both supply and demand as Duca et al. , (2021). These indicate that this is an area of constant interaction of supply and demand within the rental market. Significant shifts have been observed in the domestic rental market in the UK, driven not only by factors mentioned earlier but insights from recent studies as well. Czischke and van Bortel (2023) explored different concepts and policies that surround “affordable housing” across

various European countries, one of which being England. What they found underscores how important government policies are in shaping the rental landscape. Policies in England that aim to increase the supply of affordable housing can affect it on both sides directly. If the supply of affordable housing goes up, there could be a right shift in supply (Diagram 2), depleting some pressure on rental prices. However, the effectiveness of such policies is not set as its outcome can differ depending on how elastic supply and demand are. Francke and Korevaar (2021) also uncovered interesting insights about how historical outbreaks impact housing markets and offer a historical context for recent trends. Their research highlights that past pandemics have often shifted housing markets drastically, particularly when remote work increased and consumer behavior changed. This research reaffirms our earlier analysis - the demand for rental units with a suitable home office space will remain a significant driver of market dynamics (Diagram 4). Exploration of how elasticity concepts like price elasticity of demand (PED) and price elasticity of supply (PES) can be applied in the real world setting, makes sense of how sensitive rents and quantities are regarding shifts in supply and demand- confirming.

Conclusion Our examination began with the basic principles of supply and demand. We wanted to explain the laws that govern their interactions. The equilibrium between rental supply and tenant demand is a pivotal reference point, represented by the intersection on our diagram. A cornerstone concept if you will. Its here we began to investigate shifts in supply and demand and what they mean. The next section used diagrams to delve into this topic. We delved into the act of expanding rental supplies (Diagram 2) and contracting them (Diagram 3). As well as shifting tenant demands (Diagrams 4 and 5). Each scenario was linked to real-world occurrences, which underlined economic theory’s application in UK rental markets. Elasticity was our focus in the third section. This is a central concept that explores how responsive both demand and supply are to changes in prices, also shown through diagrams for elastic or inelastic scenarios (diagrams 6-9). It’s here where we get another look at how sensitive these markets can be. Our analysis also included research from Czischke and van Bortel (2023) and Francke and Korevaar (2021). These studies show how much government policies and historical context affect market dynamics. These findings bring out the multifaceted nature of the rental market, where external factors tie into economic principles to shape its trajectory. In conclusion, examining the UK domestic rental market has shed light on how complex this economic sector is. The dynamics of the market are not just driven by supply and demand forces but are influenced by elasticity, government policies, and historical context in intricate ways.

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References Bertram, N., Fuchs, S., Mischke, J., Palter, R., Strube, G., & Woetzel, J. (2019). Modular construction: From projects to products. McKinsey & Company: Capital Projects & Infrastructure , 1-34. Cavalleri, M. C., Cournède, B., & Özsöğüt, E. (2019). How responsive are housing markets in the OECD? National level estimates. Czischke, D., & van Bortel, G. (2023). An exploration of concepts and polices on ‘affordable housing’in England, Italy, Poland and The Netherlands. Journal of Housing and the Built Environment , 38 (1), 283-303. Duca, J. V., Muellbauer, J., & Murphy, A. (2021). What drives house price cycles? International experience and policy issues. Journal of Economic Literature , 59 (3), 773-864. Francke, M., & Korevaar, M. (2021). Housing markets in a pandemic: Evidence from historical outbreaks. Journal of Urban Economics , 123 , 103333. Nanda, A., Xu, Y., & Zhang, F. (2021). How would the COVID-19 pandemic reshape retail real estate and high streets through acceleration of E-commerce and digitalization?. Journal of Urban Management , 10 (2), 110-124.

Economics for Business

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