Question

6. In 1996, the average house price in the UK was about $75,000. By 2007, prices had risen to around $190,000. This increase in prices had been fueled by rising incomes and cheap loans.
a) Draw a demand and supply diagram to show what caused house prices to rise between 1996 and 2007.

b) There is an improvement in technology in the housing industry. Draw a diagram to show the effect this would have on house prices.

Answer 1

Please find attached the required diagrams.

As a result of the rising incomes and cheap loans, the demand for houses would increase. This would cause an outward shift of the demand curve. As a result, equilibrium price and quantity of houses would increase.

An improvement in technology in the housing industry would lead to an increase in the supply of houses. This would lead to an outward shift of the supply curve. Equilibrium price would reduce and equilibrium quantity would increase.

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