impact of a rise in average house prices (3)

Question 1

microeconomic impacts of a rise in average house prices in the UK

Answer 1

1. harder to move to a particular area e.g. London -> increased geographical immobility of labour -> labour shortage in London -> labour market failure (regional wage differences)
2. for home owners -> wealthier -> more spending -> incr revenue for businesses (name industry) -> incr profits -> more funds for investment (e.g. R&D, machinery) -> incr dynamic efficiency -> better quality of goods + services -> incr consumer satisfaction (if businesses expand w/ incr production -> incr demand for labour (dervied demand) -> higher wages for workers). IF businesses invest in more cost-effective methods -> productions costs fall -> lower prices -> incr consumer surplus -> incr consumer welfare
3. for home buyers -> reduces consumer surplus -> higher cost of living -> decr consumer welfare

Question 2

evaluate microeconomic impact of a rise in average house prices in the UK

Answer 2

• EVAL: **(geographical immobility) **-> depends on industry, e.g. remote working -> people do not have to work in London -> overcomes problem. also, if there’s a labour shortage (e.g. due to lack of skills) -> firms can provide training or gov. can incr accessibility to eductation e.g. apprenticeship schemes
• (EVAL: incr profits for firms if homeowners spend more because they’re wealthier) -> if the business is selling an inferior good, e.g. microwaveable food, YED = -ve -> incr wealth = quantity demanded decreased = less profits for firms
• (EVAL: reduced demand bc house = expensive) also dependent on PED, e.g. if there’s few cheaper alternative houses in a particular region, PED = inelastic -> home buyers less price sensitive
• firms may not even reinvest
• -ve externality -> certain industries lose out e.g. cars and jewellery due to incr mortgages + rent

Question 3

macroeconomic impact of a rise in average house prices

Answer 3

• actual eco. growth: homeowners = wealthier ( +ve wealth effect) -> incr consumer confidence -> incr C (60% of AD) -> incr AD -> incr real GDP -> actual eco. growth -> incr demand for goods + services = businesses expand production to meet this -> incr demand for labour -> reduced cyclical unemployment -> workers have source of income -> more consumer spending -> AD incr MORE -> real GDP incr MORE

Question 4

evaluate macroeconomic impact of a rise in average house prices

Answer 4

• HOWEVER, poor distribution of wealth as home buyers lose out -> incr inequality

home buyers -> incr living costs -> erodes purchasing power -> workers demand higher wages to afford higher living costs -> incr costs for firms -> costs passed down to consumers (higher prices for goods + services) -> higher living costs -> cycle continues -> ‘wage-price spiral’ -> cost-push inflation
consumption won’t rise for non-house owners