Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
The rental market in Britain has changed dramatically during and after the recession. People, who were not able to afford buying a house or taking a mortgage, decided to rent a property instead and keep on saving. The demand curve shifted to the right causing prices to rise. With limited supply, rents increased by up to 35% in 2010
Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
a) Factors, which affected the demand for rental properties:
Difficulties in getting mortgages
High house prices
Higher education fees (“However, rises in university fees will see student demand come down - though foreign student demand will remain strong, thanks to the pound's weakness. ”)
b) Factors, which affected the supply of rental properties:
Lower demand for buying houses (people decided to let their properties)
“The supply of buy-to-let mortgages is improving and new lenders have joined the market, but there have not been enough new entrants to replace those that were pushed out during the credit crunch.”
To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?
A sealed bid format is fair on potential tenants because it is the price that matters. Landlord is more likely to make his decision according to your proposal. It is not so important if you are a student, have children or a pet. Moreover, a potential tenants will not end up in a situation, when a landlord suddenly changes his mind, because he has received a better offer.
Richard Davies, head of lettings of Chesterton Humberts, said that there was no mystery in the sealed bid process.
"If we do have more than one offer for a property, what we do is give a deadline for people to submit their best and final offers. All those offers go to the landlord who will decide who to go with"
This strategy favours property owners who become more likely to receive bigger profit, because of higher competition. Additionaly, "The only people who like sealed bids are vendors who have most probably achieved a figure way above their asking price," says Tim Le Blanc-Smith, Director of John D Wood & Co., South Kensington.
How could this sealed bid strategy be an example of price discrimination?
If a potential tenant offers a much higher price than the value of the property it a discrimination against average people who propose a reasonable price.
What is likely to happen to your consumer surplus if you have to submit a sealed bid?
After submitting a sealed bid in highly competitive market consumer surplus is likely to fall and reach 0.
That's what I think,
MANU
Why will consumer surplus fall?
ReplyDeleteConsumer surplus is the difference between the price a buyer wants to pay and the actual price paid. After submitting a sealed bid (meaning higher competiveness) the price is usually higher, so consumer surplus falls. For example, imagine that the consumer is prepared to pay $100 and the price is $80. How much is consumer surplus? Yes, $20. If there is a sealed bid submitted, the price will be higher. Let's take $90. Now, the consumer surplus is $10, right? It has decreased from $20 to $10 :)
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