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Welcome again to Real
Estate Economics.
This is the fourth
talk in the series.
I'm John McDonald,
Emeritus Professor of Economics,
University of Illinois,
Chicago, and Emeritus Professor
of Real Estate,
Roosevelt University.
This is said the fourth
topic in the series.
Today we are moving on to the
economics of real estate.
We completed a little
unit on real estate law,
contracts and
ownership, and so on.
Now, we're going on to
considering how real
estate markets function.
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We begin by considering good old
basic supply and demand.
Economists like to talk
about supply and demand.
If you can say
supply and demand,
you can sound like an economist
and I shall shortly indeed now.
Economic analysis is based on
economic models that are
simplified versions
of the world.
We make simplifying
assumptions that capture,
we hope, the essence
of what is going on.
A model of supply and demand
presumes, first of all,
that there are large numbers
of suppliers and demanders.
I think that's the case with
most real estate markets.
Lots of houses to be sold,
lots of people who want
to buy them, and so on.
The product supplied
is pretty uniform,
it doesn't have to
be totally uniform,
but we're talking
about the same thing.
Now, houses vary a
great deal, of course,
in their size and so on,
but somehow the
market functions.
There are lots of
buyers and sellers,
so it's close enough.
Close enough, as we say.
Markets tend to reach a
state of equilibrium.
In other words, there's
no incentive to
change the price or the
quantity being bought and sold.
We reach some sort
of equilibrium
where nothing will be changing.
Of course, things do change,
but there's an equilibrium
at least temporarily.
Finally, in real estate,
and this is very important
I think, there is
a "short run" in
which the supply of
real estate is fixed.
There's a certain
amount of space,
office space, downtown.
There's a certain amount of
housing in your
neighborhood, and so on,
but there's a "long run" in
which supply can be variable.
There's an incentive
to increase supply.
In the "long run" will be,
the supply will be increased
or if there's an incentive to
reduce supply and this
may take a long time,
but supply will, in
fact, be reduced,
buildings will be
abandoned, and so on.
