Problem
Consider the market for off-campus rental accommodations suitable for students in Sydney (rooms, studios, and small apartments in the private market). Assume that this market is perfectly competitive and satisfies the laws of demand and supply. Suppose that the market is originally in a long-run equilibrium. Please discuss the following questions.
1. Consider the market supply curve in this rental market in the short run.
Discuss what sort of slope one would expect this market supply curve to have and the price elasticity of supply. Provide logical arguments to support your answer.
Since the lift of the Covid-related travel bans in early 2022, a large number of international students have returned to Sydney. Analyse the impact of this event on the market for off- campus rental accommodation in parts (2) to (5).
2. How does the arrival of international students after the lift of travel bans impact the market for off-campus rental accommodation in the short run?
Explain the impact on both short-run demand and short-run supply, if any.
Considering your answer in part (1), describe the impact on the short-run market equilibrium: how do price and quantity change compared to the original market equilibrium, and which one changes more? How do landlords' profits change (1 mark)?
Support your answer by drawing the short run changes in a clear and well-labelled diagram that shows (a) changes to the market demand and supply (if any), and (b) the old and new market equilibria. [For simplicity, you can draw the market demand and supply curves as straight lines. You do not need to draw a diagram for the landlords' profits.]
3. Now suppose that the rental property industry is a constant-cost industry with free entry and exit in the long run. Based on your answer for (b), discuss how the arrival of international students after the lift of the travel bans impacts the market equilibrium in the long run.
Explain how the market adjusts from the short-run equilibrium (that you described in part 2) towards a new long-run equilibrium.?Comparing the new and original long-run market equilibria, how do price and quantity change, and which one changes more? How do landlords' profits change?
4. Consider the long run market supply curve in this market. What is the slope (1 mark) and price elasticity of the supply curve in this rental market in the long run? Motivate your answer.
Support your answer with two clear and well-labelled diagrams side by side. The first diagram is a market demand-supply diagram that illustrates (a) the market adjustments from the original long-run equilibrium to the short-run equilibrium in part (2), (b) the adjustments from the short-run equilibrium in part (2) to the new long-run equilibrium, and (c) the long run market supply curve. The second diagram shows a landlord's long-run cost curves and profits. For simplicity, you can draw the market demand and supply curves as straight lines, and the long-run MC and ATC of a typical supplier as U-shaped curves.
5. Suppose that a friend of yours who has never studied economics asks you: "How can one tell when this rental market has reached a short-run equilibrium? How to tell when it has reached a long-run equilibrium?"
Answer these questions in plain English, without using any jargon from economics (e.g., if, hypothetically, that your answer involves the word "cost", you must explain to your non-economist friend exactly what type of cost you are referring to). You will receive 2 marks for identifying the correct conditions for short-run and long-run equilibria. You will receive up to 2 bonus marks if your answer is clear and easy to understand for people without a background in economics.