UCSI COLLEGE

ACADEMIC YEAR 2020

ASSIGNMENT 1 COVER SHEET

Course Details

Subject Code : DRE2043

Subject Title : Principles of Economic

Trimester : January 2020

Important Note : Submission of assignments is the responsibility of the students.

Student’s Details

Name and ID : JESLYN LEE ERN XIN (2019000279)

Question A....................................................................................................................................1-2

Question B....................................................................................................................................3-4

Question C....................................................................................................................................4-5

Question D.......................................................................................................................................6

References........................................................................................................................................7
QUESTION A

The law of supply and demand is a theory that explains the interaction between the sellers of a
resource and the buyers for that resource. The theory defines what effect the relationship between
the availability of a particular product and the desire for that product has on its price. These two
laws interact to determine the actual market prices and volume of goods that are traded on a
market. (Chappelow, 2019)

An increase in supply will lead to a decrease in prices of properties. Factors such as an increase
in number of producers or improve of technology affects the price of property. Where more
producers are more willing to produce, the supply of property rises. Referring to the diagram
below, the initial equilibrium is E0 with price P0 and Q0 of property. An increase in supply will
lead to a increase in the general demand of property. As such, supply curve shifts to the left from
S0 to S1. The new equilibrium point is E 1 with new lower price P1 and lower quantity of Q1
amount of property.

Price S0
S1

P0 E0

P1 E1

Q0 Q1 D0 Quantity of property

Other than that, the price of property will also tend to decrease when the demand of it
decreases, such as rising interest rates and a decrease in economic growth. These factors will lead
to a decrease in people’s income. In a result, low-income or unemployed people cannot afford to
buy a property, as they required to pay more. In the short term, it decreases the general demand
for property. Referring to the diagram below, the initial equilibrium is E0 with price P0 and Q0 of
property. A decrease in economic growth will lead to a reduction in the general demand for

1
property. As such, the demand curve shifts to the left from D0 to D1. The new equilibrium point is
E1 with new lower price P1 and lower quantity of Q1 amount of property.

Price

S0

P0 E0

P1 E1

D0
D1
Quantity of property
Q0 Q1

2
QUESTION B

A price ceiling (in other words, a maximum price) is put into effect when the government
believes the price is too high and sets a maximum price that producers can charge; this price must
lie below the equilibrium price in order for the price ceiling to have an effect. The price ceiling is
usually instituted via law and is typically applied to necessary goods like food, rent, and energy
sources in order to ensure that everyone has access to them.(Prateek, 2020)

Rent control is a common type of price ceiling, it often imposes to make housing more
affordable for low-income tenants. Assuming that the price ceiling of affordable home for
domestic buyers is set at RM300,000 per unit. Where the price ceiling is below the market
equilibrium price, there will be a reduction in supply because suppliers are not wiling to produce
more as they do not get a price that would make them profitable. A Reduction of supply will lead
to a vigorous competition for limited supply from consumers, a shortage then occurs when there
is an excess in demand and a limited supply of property. The implement of price ceiling for
properties will cause several affects, such as reduction in quantity of property produced or
emergence of black market.

The diagram on page 5 shows a price ceiling in equilibrium where the government has set the
maximum price of affordable home at RM300,000 per unit. The initial equilibrium is E0 with
original price P* and Q* of property, but with the price ceiling, the quantity supplied reduced to
Q0 and the quantity demanded rises to Q1. The distance between quantity supplied (Q0) and
quantity demanded (Q1) is a shortage.

3
 Price
S

P* E0

RM300k Price ceiling

Shortages occur
D
Quantity of property
Q0 Q*
Q1

QUESTION C
4
 A price floor or a minimum price is a regulatory tool used by the government. More
specifically, it is defined as an intervention to raise market prices if the government feels the
price is too low. In this case, since the new price is higher, the producers benefit. For a price floor
to be effective, the minimum price has to be higher than the equilibrium price. The most common
example of a price floor is the minimum wage. This is the minimum price that employers can pay
workers for their labor. (Prateek, 2020)

Assuming that the price floor is at RM600,000 when the previous minimum price for foreign
buyer is RM1,000,000. It is not binding and has no affect on the market outcome, that means the
price floor is not effective. With a lower equilibrium price, the suppliers reduce the supply of
properties. Therefore there will be a increase in the general demand for property, because the
price of property is more affordable for foreign buyers.

In the price floor diagram below, shows the setting of price floor for property at RM600,000.
Initial equilibrium is E0 with original price P* and Q* of property. A decrease in price will lead to
an increase in the general demand of property. As such, the demand curve shifts to the left, from
D0 to D1. The new equilibrium point is E1 with lower price P1 and higher quantity of Q1 amount of
property.

Price
S

E0
P*
E1
P1

D1
D0
Quantity of property
Q * Q1

5
QUESTION D

Besides organising the housing expo, government should recommend the use of more
advanced and cost-effective construction technologies to reduce property costs. As construction
costs remain one of the main determinants of property prices. When construction costs reduces,
the price of property decreases, leading to an increase of buyers in overall demand for property,
which minimizes excessive property supply.

Moreover, government can provide a lower interest rate or borrowing costs. When interest
rates are low, people are usually willing to take on more debt. They may be able to fund a home
purchase because they don’t have to pay interest. If more buyers flood the market, housing
demand will increase. And if the supply of housing is limited, people will want to purchase even
more properties with a low-interest rate.

6
REFERENCES

Chappelow, J. (2019). Law of Supply and Demand. Retrieved from

Prateek Agarwal. (2020, February 8). Price Ceiling. Retrieved from

Prateek Agarwal. (2020, February 8). Price Floor. Retrieved from