Supply and Demand Simulation

Supply and Demand Simulation Summary

University of Phoenix

ECO360, Economics for Business I

The Supply/Demand simulation involves acting as property manager for GoodLife Management in the fictional town of Atlantis. GoodLife Management manages seven apartment complexes in Atlantis. The property manager is expected to adjust the monthly rental rate of two-bed rental apartments and the quantity of apartments supplied based on the market trends. Factors that influence the supply and demand for apartments include personal preferences, economy, income, and rental rates. Each of these factors affect the ratio of vacant and occupied apartments. Decisions regarding supply, demand, and price require careful evaluation. Regular monitoring of supply and demand is necessary to remain competitive in a crowded rental market. As the community grows, GoodLife must make adjustments to remain viable in the real estate industry.

The objective of the first simulation was to determine the monthly rental rate for two-bedroom apartments on temporary leases. The vacancy rate had to be decreased to less than 15% while maximizing revenue. As the rental rate of the apartments was decreased, demand increased, resulting in a lower vacancy rate. The simulation stressed that as the rental rate is lowered revenue initially increases, reaching a maximum at a particular rental rate. Demand then decreases. The key is to determine at what level the rental rate offers the highest possible revenue with a low vacancy rate.

The next portion of the simulation introduced the concept of the supply curve to demonstrate the price required to lease all the available apartments. When the rental rate was increased, more two-bedroom apartments were supplied. As stated in Macroeconomics:” Quantity supplied rises as price rises, other things constant” (Colander, 2004). This illustrates that the supply curve has an upward slope.

The third portion of the simulation required the property manager to determine the equilibrium monthly rental rate for two-bedroom apartments. In order to bring equilibrium to the supply and demand of apartments the property manager must lower the monthly rental rate in an attempt to decrease the surplus of available apartments. When the quantity demanded and quantities supplied are equal, there is no need for the number of apartments or the rental rate to change and the market is said to be in equilibrium.

The fourth portion of the simulation required the property manager to determine the direction of shift in the demand and supply curves when a new company moved its headquarters to Atlantis. The increase in the population of Atlantis increased the demand for apartments with temporary leases. The supply of temporary lease apartments, however, remained the same. Therefore, there was an upward mevement along the demand curve. Since demand is greater than the supply of apartments, rental rates are increased. As rates are increased, demand decreased and the supply increased. Eventually, as rental rates and supply increased with less demand, equilibrium is reached.

The fifth scenario provided a situation in which the housing preference changed from the two-bedroom apartments supplied by Goodlife to detached homes provided by a competitor. As a result, GoodLife needed to lower rental rates to attract more renters. The decrease in demand causes the demand curve to shift down. The decrease in demand of apartments created a surplus of apartments at the original rental rate. To bring the demand and supply to equilibrium, the rental rate was reduced to entice new tenants to rent in Atlantis. This decreased the rental rate and the quantity of rental units available.

In the next situation there was continued decrease in the demand for two-bedroom apratments due to preference. In response, the supply was decreased by converting apartments to condominiums. This shifted the supply curve down. There was then a greater decrease in supply than the decrease in demand, and a shortage of apartments occured. To bring about equilibrium once again, the property manager had to increase the rental rates. The equilibrium rental rate was then higher than before, but the equilibrium quantity was less.

The last situation in the simulation introduced the concept of governmental price controls for monthly rental rates. Since the price ceiling was lower than the equilibrium price, the quantity demanded was higher than the quantity supplied. Goodlife could not afford to rent all apartments at the ceiling price. Other forms of revenue, such as increased key deposits, had to be implemented. Consequently, there was an excess demand, creating a supply shortage. Goodlife was