Civil Engineering Reference
In-Depth Information
If buildings happen to be scarce in one time period, then high market-clearing
prices will prompt construction firms to begin new projects. This rise in production
will in due course depress market prices, which sets off a major contraction in the
scale of production. We show this process in
Figure 14.7.
The fixed amount of
property available in the short run means that the market-clearing price may rise
to P
1
. The supply curve indicates that, at price P
1
, construction firms would like to
produce Q
2
, although they cannot do so immediately. Building contractors begin to
make plans to adjust output based on the current market price and try to produce
Q
2
. After a time-lag, a potentially unstable situation is likely. Indeed, assuming the
pattern of demand remains unchanged, and output Q
2
is actually built, prices will
have to drop to absorb the excess supply. This will ultimately result in a contraction
of production, leading once more to higher prices. Note that in this example, market
prices move above and below the equilibrium level and are not stable. This price
instability could be greater or less depending on the elasticity of the supply and
demand curves.
Figure 14.7
A cobweb diagram showing how property prices can
fluctuate
Commencing from the equilibrium price, a change in the conditions will move the
market from its equilibrium position. In the short term, the market is faced with a
perfectly inelastic supply curve, as shown by the dashed line (P
ES
). The longer-run
supply curve S indicates that at price P
1
, construction firms would like to build Q
2
.
These structures will take some time to construct. However, when Q
2
is eventually
completed, the price will need to fall to P
2
to absorb the excess supply. This will result
in a subsequent contraction of supply as shown by position 3. The shortage of supply
will cause prices to be bid up and the process continues.
P
ES
= 0
S
P
1
1
P
P
2
2
3
D
Q
1
Q
Q
2
Quantity of new property
