Supply and demand are the two fundamental concepts that have become a basis for numerous economic theories. They describe interaction between sellers and buyers in the marketplace and determine the price that the two trading parties agree on. Supply can be broadly defined as the amount of product or service offered by the sellers at any price level. Demand, respectively, is the amount that consumers are willing and able to purchase at any possible price level. In a perfectly competitive market, where no distortions or imperfections occur, the point where supply curve intersects the demand curve identifies the price, which is going to exist in the market. Furthermore, under perfect competition, if the market situation changes, supply and demand will immediately react to adjust the price to the current demand/supply level. This self-regulating mechanism is referred to as the invisible hand and was first proposed by Adam Smith in his book “The Wealth of Nations”.
The law of supply and demand can be applied to the real estate market in explaining how millions of Americans can find places when they move to new locations. In this case, demand reflects the housing that American want to purchase in a certain location at different price levels. More attractive destinations usually enjoy higher demand. However, the natural shortage of housing in these locations is reflected in high prices, as indicated by the law of the invisible hand. Prices continue to rise as accommodation becomes more scarce until only a few people can afford moving to these areas. On the other hand, in less attractive locations the demand for real estate is originally low. As housing supply in the short-run remains the same, prices in these areas will be relatively low. This fact will attract new buyers, who will consider these destinations due to the low prices. Some may decide not to move at all if no destination offers the price-utility ratio that they consider desirable and acceptable. In this way equilibrium in the market will be restored through the self-regulating market mechanisms and all Americans, who change their residence will find the most suitable place to settle.
References
Boyes, W. J. & Melvin, M. (2011). Economics. (8th ed.). Cengage Learning: Mason, OH.
Heyne, P., Boettke, P. J., & Prychitko, D. L. (2010). The Economic Way of Thinking. (12th ed.). Prentice Hall.
