Real Estate Economics by Pirounakis Nicholas G

Author:Pirounakis, Nicholas G.
Language: eng
Format: epub
ISBN: 9780415676359
Publisher: Taylor & Francis (CAM)

Figure 8.4 A capital stock adjustment model with shifted long-run equilibrium: the broad view.

In Figure 8.5, we examine the adjustment process in greater detail.

Explanation of Figure 8.5

As a result of some disturbance, demand shifts from D1 to D2. At the initial equilibrium stock Qe1, demand price rises to a(= P2). At price a, the quantity supplied at the original supply line (Ssr1) is Q2 (corresponding to a supply price b), but at that quantity, the demand price is c.

In the meantime, the higher demand price a has called forth more construction, q2; which means that the quantity of space supplied is not Q2, but larger: the supply line has shifted to Ssr2.

The demand price, though, has dropped to c. At price c, the quantity of stock supplied (on the basis of Ssr2) is given by supply price d. But because of yet more construction (although less than before, since the demand price has been dropping), the actual quantity of stock supplied is larger still, given by Ssr3.

The process goes on and on, associated with progressively lower demand prices, smaller increases in construction, and smaller increases in the stock. Eventually, equilibrium is reached at (approximately) Pe2, Qe2, and supply Ssr5, with construction being simultaneously equal toqe2(larger than initial construction qe1, and equal to the larger volume of stock depreciation).

In this formulation, the process of adjustment does not involve jumping from one short-run equilibrium to another. This is problematic because it does not explain satisfactorily how each of those equilibria is arrived at. By contrast, any equilibria depicted in Figure 8.4 are notional (i.e., unrealized) rather than actual. The whole process of adjustment is dynamic and unstable until Pe2 = demand price = supply price is reached, and construction = increased depreciation (assuming that the initial shock was a price rise).

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