right1PROPERTY ECONOMICS AND FINANCE 2
00PROPERTY ECONOMICS AND FINANCE 2
LECTURER: MAARTEN VAN DOESBURGH
COURSE: REAL ESTATE
DUE DATE: 26 FEBRUARY 2018
NAME AND SURNAME STUDENT NUMBER CONTRIBUTION IN THE GROUP
Siphokazi Mbelebele217128130 100%
Noluthando Njumbuxa217029396 100%
Qhawekazi Jadezweni216160596 100%
Khanya Gubevu 217095925100%
Sibulele Mahlanza217159354 100%
THE FIELD AND SCOPE OF ECONOMICS
Economics is the study of production and consumption of goods and services and also the transfer of wealth to manufacture and obtain goods. It explains how people relate within markets to get what they want. It also reveals why people, together with the governments behave in particular ways.
There are two main components in Economics, namely Microeconomics and Macroeconomics. Microeconomics focuses on the actions of individuals and industries and analyses basic elements in the economy including, individual agents and markets their interactions and the outcomes thereof. Individual agents includes households, firms, buyers and sellers. Macroeconomics analyses the economics of the whole country(meaning aggregated production, consumptions, savings and investments) and issues affecting it including unemployment of resources( labour, capital and land), inflation, economic growth and the policies that address these issues.
The scope of Economics is very broad and wide. It can be divided into sections. Economics is a science or an art. Science teaches us to know and an art teaches us to do. Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behavior of individuals, groups and organizations. Economics attempts to explain economic behavior which arises when scarce resources are exchanged.
SCARCITY AND OPPORTUNITY COST
Humans have unlimited wants, which is why there is never a time that one is satisfied and not in need of anything. Resources are not enough and the ones available are not able to meet those human wants. This is known as scarcity; where there are unlimited human wants.
In economics factors of production are also resources. Why do we say that resources are scarce? Imagine you are stranded on a small desert island with crabs and palm trees. The only natural resource available to you are the crabs that you can eat and the palm trees that you can use for shelter. The capital will be limited to any money in your pocket and labour will be limited to you alone.
The resources are scarce because there are fewer of them than you would like. These resources are not enough to provide for your needs and wants. Do rich people face the same dilemma of scarce resources? Remember, scarcity is not the same as poverty. For example, even for rich people, nature only provides limited water and oil supplies. If you look at the time as a resource, we all receive the same limited number of hours each day even rich people have 24hours to use a day. So scarce resources confront all individuals and organisations.
The moment you make a choice, you give up something else. The opportunity cost of a choice is the value of the opportunity you gave up when you made your choice. It is the next best alternative that you did not choose. In our multi-dimensional lives, we cannot have everything we want or do everything we would like to do. We always have to give something up. For example, you decide that you want to go swimming this afternoon because it will give you the most satisfaction. The opportunity cost is going to the movies, because that is what you had to give up for swimming. Another example is if a producer decided to manufacture paper with its wood, the opportunity cost is manufacturing furniture, because the producer will not be able to manufacture the furniture as well.
Demand refers to the quantities of a good or service that prospective buyers are willing and able to purchase during a certain period. It relates to the plans of households, firms and other participants in the economy, not to events that have already occurred. The fact that demand is concerned with plans means that the quality demanded may differ from the quantity actually bought. The quantity bought or exchanged will depend on the availability of the good or service in question. The quantity demanded may be less than, equal to or greater than the quality actually bought.
Demand can be represented in words, schedules or numbers, curves or graphs and equations and symbols. The demand theory describes individual customers as rationally choosing the most preferred quantity of each good, given income, prices and tastes. The law of demand states that in general price and quantity demanded in given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy.
Demand curve shows what quantities of a good buyers are willing to buy at different prices. It’s not about how much they actually buy, but about how much they would want to buy if a certain price was offered. A demand curve is only valid if all other relevant factors are held constant (ceretis paribus) with other things the same.
Factors that affect demand are:
The buyers income
Prices and price changes on the other goods. We will make a distinction between complementary goods and substitute goods. An example of complementary goods is right and left shoes. If the price of right shoes rises then the demand for right shoes will typically decrease. However, the demand for left shoes will also typically decrease. Consequently, the demand for left shoes partly depends on the price of another good: right shoes.
What consumers demand is largely a matter of taste. If there is a change in taste, there is actually also a change in demand. Taste can change for many different underlying reasons.
Supply can be defined as the quantities of a service that produces plan to sell at each possible price during a certain period. As in the case demand, supply refers to planned quantities, the quantities that producers or sellers plan to sell at each price. Just as consumers must be able to carry out their plans, producers must be willing and able to supply the quantities concerned. There is also no guarantee that the quantity sold or exchanged will depend amongst other things, on the demand for the good or service in question. The quantity supplied during a specific period may therefore be greater than, equal to or smaller than the quantity actually sold or exchanged.
The other side of the equation to demand is supply. Supply comes from a variety of sources in an economy ranging from an individual’s willingness to supply his or her own labour to the supply of products on to the market by a large multinational corporation. All suppliers will essentially respond to a variety of stimuli that will encourage them to provide goods and services. Just as with the analysis for demand, a simple supply function can be formulated that highlights the main influencing variables on the supply side.
The producer counterpart to the demand curve is the supply curve. It shows how large quantities the producers are willing to sell at different prices, given that other factors that can affect supply are held constant. The supply curve is typically upward sloping or horizontal but it could also be downward sloping. E demand curve is also valid over a certain period.
Supply is a concept measured over a period of time (hour, day, week, month etc). It can also be expressed in words, schedule, numbers, curves, graphs or equations. Supply is typically represented as a function relating price and quantity, if other factors are unchanged. That is, the higher the price at which the good can be sold, the more of it producers will supply. The law of supply states that in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply.
Factors affecting supply are:
Factor prices i.e. wages, prices of machines and compensation to owners and lenders. In other words, changes in the cost of production.
Laws and regulations that apply to the production.
Prices of other goods the firm produces or could potentially produce. Perhaps the producer is producing blue and green pens. If the price of green pens rises, she is likely to shift over resources (workers and machines) to that production and there is less with which to produce blue pens. Consequently, the supply of blue pens decreases, even though the price of blue pens is unchanged.
EQUILIBRIUM (DEMAND AND SUPPLY)
In economics, equilibrium is a state where economic forces (supply and demand) are balanced and in the absence of external influences, the values of economic variables will not change.
In the standard textbook model of “Perfect Competition,” equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this instance, refers to a condition where the market price is established through competition such as; the amount if goods/services sought by buyers is equal to the amount of goods/services produced by sellers. This price is often called the “Competitive price” or “market clearing price,” and will not change unless demand or supply changes. The quantity is then called “Competitive quantity,” or “market clearing quantity.”
However, the concept of equilibrium in Economics also applies to Imperfectly Competitive markets, where it takes the form of a Nash Equilibrium.
Properties of Equilibrium:
Three basic properties of equilibrium in general have been proposed by Huw Dixon, and they are;
Equilibrium property P1: The behavior of agents is consistent.
Equilibrium property P2: No agent has an incentive to change its behavior.
Equilibrium property P3: Equilibrium is the outcome of some dynamic process (stability).
Example: The Competitive equilibrium
In a competitive equilibrium, supply equals demand. Property P1 is satisfied, because at the equilibrium price the amount supplied is equal to the amount demanded. Property P2 is also satisfied, demand is chosen to maximize utility given the market price: no one on the demand side has the incentive to demand more or less at the prevailing price. Likewise, supply is determined by firms maximizing their profits at the market price: no firm will want to supply any more or less at the equilibrium price. Hence, agents on neither demand, or supply side will have the incentive to alter their actions. To see whether P3 is satisfied, consider what happens when the price is above equilibrium. In this case there is an excess supply, with the quantity supplied exceeding that demanded. This will tend to put downward pressure on the price to make it return to equilibrium. Likewise, where the price is below the equilibrium point, there is a shortage in supply leading to an increase in prices back to equilibrium. Not all equilibria are stable in the sense of Equilibrium property P3. It is possible to have competitive equilibria that are unstable. However, if an equilibrium is unstable, it raises the question of how you might get there. Even if it satisfies properties P1 and P2, the absence of P3 means that the market can only be in the unstable equilibrium if it starts off there.
In most simple microeconomic stories of supply and demand a static equilibrium is observed in a market; however, economic equilibrium can also be dynamic. Equilibrium may also be economy-wide or general, as opposed to the partial equilibrium of a single market. Equilibrium can change if there is a change in demand or supply conditions. For eg; an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold until there is an exogenous shift in supply or demand ( changes in technology or tastes). With that being said, there are no endogenous forces leading to the price or the quantity.
Varian, Hal R. (1992). Microeconomic Analysis (Third ed.). New York:
Norton. ISBN 0-393-95735-7.
Dixon, H. (1990). “Equilibrium and Explanation.” In Creedy. The Foundations of Economic Thought. Blackwells.pp. 356-394. ISBN 0-631-15642-9. (reprinted in Surfing Economics).