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Basic market theory

Published on March 31, 2024   12 min

A selection of talks on Finance, Accounting & Economics

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0:00
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.
0:42
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.

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