Question from Past Microeconomics Qualifying Exam[]
Fall 2004 - Section I, Question six, George Mason University
T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
A homeowner who sees a new housing development in his neighborhood should be depressed because an increase in supply means lower prices.
Answer[]
Uncertain. Because nothing is stated about the changes in housing demand.
Mthomas1776 19:53, 30 July 2006 (UTC)
- Assumption one: Supply changes given that Demand is held constant.
- If the new housing is a substitute for the current housing stock then the increased supply will move along the demand curve and set a market price lower than the previous price.
- Assumption two: Supply of housing increases and Demand changes.
- This could occur if the new housing provided is compementary to the current stock of housing. Often single family homes and apartments will be situated in the same school system, this increased diversity might suggest that the school system has more resources to draw on creating more demand for the current stock of houses. This would be an increase in an urelated supply and and increase in the demand in the same market. This is seen as a movement along the supply curve to a higher price for current stock.
Original Answer: It depends on the function the property is serving. If the house is occupied by the owner new housing development in the neighborhood will increase property values and is therefore beneficial to the owner. However, if the owner is renting the house out to tenants an increase in the housing stock might suggest lower rent income, given that demand for rental property in the area is constant. These effects can either offset eachother or either effect can be stronger leading to either higher value of the property or lower value of the property.
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