Transcript Real Estate Economics

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Chapter 2
REVIEW OF THE ECONOMIC PRINCIPLES OF CAPITALISM
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Economics Revisited
A Social Science
Studying Distribution of
Scarce Resources
Choice & Opportunity Cost
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Economic Value
Utility
Scarcity
Effective Demand
Transferability
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Span of Economic Systems
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Economics
 about choices and trade-offs
 not an exact Science
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Society must answer these questions:
What to produce?
How to produce it?
For whom to produce it?
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Key Principles of Capitalism:
 Private Property
 Private Enterprise
 Competitive Markets
 Profit Motive
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Pure Capitalism
Supply and Demand decides what, how, and for
whom products and services are produced.
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United States Economy
 is a mixed capitalistic system
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Economic Principles in Action
The four essential resources that are needed to produce goods
and services( “Factors of Production”)
1. Land
2. Labor
3. Capital
4. Entrepreneurship
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In a capitalist economy
 Owners of land receive rent for its use.
 Lenders receive interest for capital use.
 Workers sell their labor for wages.
 Entrepreneurs earn profits.
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The Circular flow of Economy
 Rents, Wages, Interest, and Profits constitute income.
 People use that income to buy goods & services.
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Market and Prices
What determines prices and output?
 The Marketplace
 A place where buyers and sellers
meet to bargain and exchange goods
& services at negotiated prices.
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When perfect competition prevail:
 There are many buyers and sellers.
 No one buyer or seller influences the market.
 Goods and services are similar.
 Bargaining establish prices.
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Imperfect competition prevails:
 if either buyer or seller exercises some control over the
market.
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Demand created by:
 Increase or decrease in population
 Increase or decrease in per capita income
 Changes in consumer taste or products
 The amount and cost of credit
 The effect of advertising
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Laws of Demand & Supply
 The lower the price - more sales
 The higher the price - less sales
 More products & services offered as prices increase
 Less products offered as prices decrease
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Elasticity
 The ratio of percent change in one variable to the
percent change of another variable.
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Causes for shift in supply:
 Change in the cost of production.
 Change in demand for one product can change supply
of another.
 Anticipation of future prices and profits can change the
amount of goods supplied.
 High profits can bring about ruinous competition.
 Above market profits can bring in other suppliers.
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Land, labor, and capital
Resource Market
Demand
Factors of
Production
Supply
The Circular Flow of Economy
goods and services
Individuals and
Households
Product Market
Supply
Goods and
Services
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Demand
Receive goods and services
Sell goods and services
Business
$$ Expenses
Demand
Resource Market
Factors of
Production
The Circular Flow of Economy
Dollars
$$ Income
Supply
(rent, wages, interest)
(rent, wages, interest)
Individuals and
Households
Business
Revenue $$
Goods and
Services
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Demand
$$ Spend Income
$$ Expenditures
Supply
Product Market
Land, labor, and capital
$$ Expenses
$$ Income
Resource Market
Factors of
Production
Demand
Supply
The Circular Flow of Economy
Individuals and
Households
Supply
Revenue $$
Goods and
Services
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Demand
$$ Spend Income
$$ Expenditures
Product Market
Receive goods and services
Business
Sell goods and services
(rent, wages, interest)
(rent, wages, interest)
Understanding how market changes will
influence price and output is essential for
real estate investors.
 The interaction of supply and demand determines
prices paid and quantity produced.
 Certain influences cause supply or demand to change.
 Prices and output change.
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