Question

What would the supply curve for houses (in Mumbai) look like for a time period of (a) the next ten hours and (b) the next three months?

Answer 1

The supply curve for houses in Mumbai is inelastic over ten hours and less inelastic over three months. Economic changes such as a population shift towards common home-buying ages, increased economic confidence, and higher loan default rates can affect demand and supply in the financial market for home loans, altering equilibrium.

Step-by-step explanation:

Supply Curve for Houses in Mumbai

The supply curve for houses in Mumbai over the next ten hours would be perfectly inelastic. This means the curve would be a vertical line as houses cannot be constructed and supplied to the market within such a short timeframe. On the other hand, the supply curve for a period of the next three months would still be relatively inelastic but not perfectly so, as there might be some new houses that can be completed and offered for sale during that time.

Effects of Economic Changes on the Financial Market for Home Loans

1. Increase in home-buying age population: This could lead to a higher demand for home loans, shifting the demand curve to the right, potentially increasing the equilibrium price and quantity.
2. Growing economy and job security: Confidence in the economy and job security would likely increase the demand for homes as more people would be willing to take out home loans, again shifting the demand curve to the right and increasing equilibrium price and quantity.
3. Higher default rates on home loans: If banks find that more people than expected are defaulting on home loans, this could lead to tighter credit conditions. Supply of loans could decrease, shifting the supply curve to the left, leading to higher equilibrium prices and potentially lower quantities of loans issued.

Demand Curve Derivation for Housing

As a housing price increases, the quantity of housing demanded decreases, which is represented by a downward-sloping demand curve. This reflects the law of demand and can be observed when a price increase leads to a shift from higher to lower quantities demanded while keeping other factors constant (ceteris paribus).