Eco360 Supply & Demand Simulation

Supply and Demand Simulation

The Supply and Demand Simulation (UoP, 2005) presented in the Economics for Business 1 class revolves around the supply and demand of two-bedroom rentals in the imaginary city of Atlantis. To complete the simulation, the user must assume the role of a Property Manager for GoodLife Management, a property management firm that manages seven apartment complexes within Atlantis. As the Property Manager, the user must adjust rental rates as changes in supply and demand require or determine how many units to supply when rates become limited. The Supply and Demand Simulation (UoP, 2005) emphasizes several economic principles outlined by Colander in his book, Economics (2004), including the laws of demand and supply, equilibrium, the effect of a price ceiling, and shifts in demand and supply.

Laws of Demand and Supply

In the Year One scenarios, the simulation (UoP, 2005) demonstrates how rental rates affect the supply and demand for apartment units. In other words, price affects the supply and demand of available goods. The law of demand states that quantities demanded by consumers will increase as prices of a product decrease and the reverse is also true, quantities demanded by consumers will decrease as prices of a product increase, as long as all other factors remain constant. A demand curve shows an inverse relationship between the price of a product and how much of that product is demanded by consumers (Colander, 2004). So the demand for GoodLife's apartments will increase if GoodLife reduces the rental rate. The law of supply states that quantities supplied will increase as prices increase and decrease as prices decrease, as long as all other factors remain constant. The law of supply represents a direct relationship between prices and quantities supplied to consumers (Colander, 2004). This means that GoodLife will increase the number of apartments supplied if rental rates increase.

Equilibrium

In the Year Three scenario, the simulation (UoP, 2005) also shows how a market strives to achieve equilibrium, where quantity supplied and quantity demanded meet at an equilibrium price. If rental rates are below the equilibrium point then the number of apartments demanded exceeds the amount supplied causing a shortage of apartments. The apartment shortage exerts an upward pressure on rates (Online Texts.com, 2005). The increase in rates will then reduce the quantity of apartments demanded and raise the quantity supplied. The back and forth process of supply and demand following price will continue until equilibrium is achieved (Colander, 2004). If the scenario is reversed and the rental rate is above the equilibrium point then the number of apartments supplied exceeds the number demanded which causes a surplus in the market. The surplus will exert a downward pressure on rental rates which will increase the quantity demanded and reduce the quantity supplied (Online Texts.com, 2005). Once again, this adjustment process will move quantities supplied and demanded back and forth to counter balance rising and falling rates. Sooner or later, both rates and quantities will reach a balance, this is the equilibrium point, but equilibrium can only be achieved temporarily or within an economic model, because multiple factors affect the market and these factors are constantly changing (Colander, 2004).

The Effect of a Price Ceiling

One factor that can work against a market trying to reach equilibrium is a price ceiling. A price ceiling is a law requiring that a price for a certain good be kept below some level which may lead to shortage and a black market (BizEd, 2005). The scenario in Year Nine illustrates how a price ceiling disturbs supply and demand changes. In the simulation (UoP, 2005), the government has imposed a price ceiling on apartments in order to help middle-income families find affordable housing in Atlantis. The price ceiling caps the rental rate at $1,550. The low rental rate increases the demand for the apartments; however, at this rental rate, GoodLife is not willing or able to lease the number of apartments that the company would be willing or able to lease out at a higher rental rate. The preceding situation leads to a shortage in the apartment market of Atlantis. Since the price ceiling keeps the rental rates from increasing, the market cannot adjust towards equilibrium and will remain in a shortage status until the price ceiling is removed (BizEd, 2005).

Shifts in Supply and Demand

Demand can also be affected by income, consumer preferences, taxes, and subsidies. The supply curve can also be affected by technology, supplier expectations, taxes, and subsidies (Colander, 2004). These other factors cause the supply and demand curves to shift in or out depending