Basic Concepts: Supply and Demand Simulation

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Basic Concepts

ECO/415 – Applied Economics in Business

December 20, 2010

Basic Concepts: Supply and Demand Simulation

Goodlife, a property management firm, located in Atlantis is responsible for the management of 2000 apartments. Their primary goal is to maintain equilibrium in the two-bedroom rental market. They are the only management firm operating in a monopoly market within Atlantis. The management team, consisting of Susan Hearst and Hal Morgan, is responsible for maintaining the equilibrium. Susan and Hal must maintain minimum or no vacancies, establish new rental rates, and set advertising schedules in order to accomplish this goal. In order to increase the quality of apartments demanded, Hal Morgan recommends lowering the rental rate and implementing a month-to-month lease. Susan Hearst recommends maximizing revenue and decreasing the vacancy rate of 28 percent to 15 percent within the first year (University of Phoenix). Factors that affect demand and supply equilibrium are explained in this simulation. The factors that affect the demand of apartments in this simulation include: changes in price, increase in population, and consumer preference. Supply is affected by the number of apartments built, number of vacancies, and the number of apartments supplied. It also explains the impact of price ceiling that local government has placed upon the lease of two bedroom apartments. The simulation helps determine the monthly rate for two bedroom apartments, and how to increase demand and supply. Other topics that are discussed within simulation include: the importance of marginal analysis in decision making, determination of appropriate output levels, fixed and variable costs of Goodlife, and marketing situations that affect company operation. Overall, this simulation will help with understanding the basic concepts in applied economics.

Changes in the Business Environment: Changes in Supply and Demand

A number of factors affected the supply and demand of two-bedroom apartments in the simulation. This simulation of Goodlife apartment management in Atlantis took place over the course of nine years. There are several situations that took place over this period of time. These include: increases in population, renter preferences, and execution of price ceilings required by the local government. All of these factors caused shifts in the supply and demand of apartments.

The first year vacancy rate was 28 percent, revenue 1.70 (per million), surplus 550, quantity demanded 1450, and rental rate 1175 a month (University of Phoenix). Susan Hearst recommended that the vacancy rate decrease to 15 percent, rental rate 1050, demand 1700, and surplus 300 (University of Phoenix). In the first year, the current rental rate and quantity supplied caused the supply curve to slope upward to the right. The current rental rate and quantity demanded caused the demand curve to slope downward to the left. The change in quantity supplied and quantity demanded changes as a particular rental rate is selected. The quantity supplied increases as the rental rate increases. The quantity demanded increases as the rental rate decreases, and there is a decrease in the quantity supplied.

Susan Hearst recommended accomplishing a zero percent vacancy rate in the third year. The rental rate became 1050, demand 2000, and supply 2000 and 0 percent vacancy (University of Phoenix). This created equilibrium between the demand and supply curve.

There was an expected increase in demand occurred when Lintech Inc. moved to Atlantis in year five. Hal Morgan recommended that rental rates be increased in response to the increase in demand. When the current apartment leases came up for renewal the rental rate increased, and new leases increased. When this increase in population occurred Lintech moved into Atlantis. The rental rate became 1300, demand 2550, and supply 2550 and 0 percent vacancy (University of Phoenix). This resulted...
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