Frozen housing market sends remodelers mixed messages
Real-world example for IB, A-Level, AP and IGCSE Economics essays: Supply, demand and prices, Economic growth and the business cycle, Firms' costs, profits and decisions
What happened
The housing market is frozen, which is sending mixed signals to home remodelers. Remodelers have traditionally served two different markets, and current housing conditions are now pulling them in opposite directions.
The economics
Demand for home renovation is closely tied to housing-market conditions: when housing transactions are weak, owners may stay put and renovate their existing homes, supporting one segment of remodeling demand; at the same time, a frozen housing market can reduce another segment of customers, such as renovation tied to buying and selling homes. Students can draw demand curves for the two segments to show how one external shock raises demand in one market and lowers it in the other.
Evaluation
This example shows that a change in overall demand does not affect all market segments in the same way, so housing-market conditions alone cannot predict the outlook for the whole remodeling industry; short-run and long-run effects may also differ, since renovation demand from owners postponing a move may not last.
Practice question
Using the effect of a frozen housing market on two different markets served by home remodelers, analyse how changes in demand affect firms' business decisions.
Where it fits in the syllabus
- Supply, demand and prices: How a change in demand or supply in one market moves its equilibrium price and quantity.
- Economic growth and the business cycle: Long-run growth in real GDP and the short-run swings between expansion and recession, when output falls below potential.
- Firms' costs, profits and decisions: How firms decide output, prices and investment from their costs, revenue and competition.
- IB Economics: Demand, Supply and Elasticity, Measuring Economic Activity, Aggregate Demand and Supply
- A-Level Economics: Supply and Demand, Macroeconomic Objectives, Aggregate Demand and Supply
- AP Macroeconomics: Economic Indicators and Business Cycle, National Income and Price Determination
- AP Microeconomics: Supply, Demand and Market Equilibrium, Production, Cost and Perfect Competition
- IGCSE Economics: Demand and Supply, Macroeconomic Objectives, Business Economics