Act like a helpful tutor and exlain me :
Consider the market for rental properties in Los Angeles and Orange counties in Southern California. Suppose that while average earnings increased by about
1

Question

Act like a helpful tutor and exlain me :
Consider the market for rental properties in Los Angeles and Orange counties in Southern California. Suppose that while average earnings increased by about 
1
0
%
 ﻿in Los Angeles and Orange counties, the average rent has increased by 
2
0
%
.
 
(
Assume for a moment that there are no rent control regulations.
)
Adjust the following graph to illustrate the rent increase
 
by either using the black point 
(
cross symbol
)
 ﻿or by shifting the supply and demand curves.
Hint: Determine whether this scenario leads to a shift in the demand
/
supply curve or a movement along the demand
/
supply curve.
The Market for Rental Properties in Los Angeles and Orange CountiesDemandSupplyNew RentVacancies Demanded with Price ControlVacancies Supplied with Price Control
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RENTAL PRICE 
(
Dollars per month
)
QUANTITY 
(
Number of vacant units
)
Demand

Supply

5
0
0
,
 
1
5
0
0
As a result of the 
2
0
%
 ﻿rent increase, the number of vacant units demanded

to
units.
Adjust the previous graph to show the ef

VIPSolutions · Accepted Answer

# Rental Property Market: Income and Rent Increases

Let's break down the scenario and work step by step:

---

## 1. Understanding the Scenario

- **Location:** Los Angeles and Orange counties, CA  
- **Situation:**  
  - Average earnings (income) ↑ by **10%**
  - Average rent ↑ by **20%**
  - Assume **no rent control** at first

---

## 2. Is This a Shift or a Movement Along the Curve?

- **Demand Curve:**  
  - When average earnings increase, people can afford higher rent.
  - **This shifts the demand curve to the right** (at every rent price, more units are demanded).
- **Supply Curve:**  
  - No information about changes in supply, so **supply stays the same**.

**Conclusion:**  
- This is a **shift in the demand curve**, not a movement along the curve.

---

## 3. Illustrating the Change on the Graph

### Before the Change
- **Equilibrium:** Where the original demand and supply intersect.
- **Equilibrium Rent:** Let's call this $ P_ $.
- **Equilibrium Quantity:** Let's call this $ Q_ $.

### After the Change
- **Demand curve shifts right (outward).**
- **Supply curve stays in place.**
- **New equilibrium:** Higher rent ($ P_1 $), higher quantity ($ Q_1 $).

#### **Graph Illustration (Description)**

```plaintext
Price (Rent, $)
 ^
 |      S
 |      /
 |     /
 |    /          D'
 |   /          /
 |  /   D      /
 | /   /      /
 |/___/______/_________> Quantity (Vacant Units)
```

- **D:** Original demand
- **D':** New, right-shifted demand (after earnings increase)
- **S:** Supply (unchanged)
- **Intersection of S and D':** New equilibrium

---

## 4. Rent and Vacancy Changes

- **Average rent increases by 20%** due to higher demand.
- **Number of vacant units increases:** At a higher price, suppliers are willing to rent more units.

> As a result of the 20% rent increase, the number of vacant units **demanded decreases** (movement up and left along the demand curve), but the **quantity supplied increases** (movement up and right along the supply curve).

---

## 5. Adjusting for Income Increase

- **Income increase:** Shifts demand curve right, as above.
- **New Equilibrium Rent:** Higher than before (e.g., before $1,500, after possibly $1,800 or $2,000).
- **New Equilibrium Quantity:** More vacant units (more rental activity).

---

## 6. Introducing Rent Control

- **Rent ceiling set at $1,800/month** (below new equilibrium rent).
- **Effects:**
  - At $1,800, **quantity demanded is higher** (people want more units at lower price).
  - **Quantity supplied is lower** (landlords less willing to rent at lower price).
  - **Shortage:** Demand exceeds supply.

#### **Graphical Points:**
- **Grey star:** Number of vacancies demanded at $1,800.
- **Tan dash:** Number of vacancies supplied at $1,800.

#### **Shortage Calculation:**
- **Shortage = Quantity Demanded at $1,800 − Quantity Supplied at $1,800**

---

## 7. Summary Table

| Scenario                         | Demand Curve       | Supply Curve      | Rent Level | Quantity of Vacant Units | Market Status           |
|-----------------------------------|--------------------|-------------------|------------|-------------------------|-------------------------|
| Original                         | D                  | S                 | $1,500     | 500                     | Equilibrium             |
| After Income & Rent Increase      | D shifts right     | S                 | $1,800-$2,000 | Higher than 500          | New Equilibrium         |
| With Rent Control ($1,800 ceiling)| D'                 | S                 | $1,800     | Qd > Qs                 | Shortage (excess demand)|

---

## 8. Key Points

- **Income ↑ ⇒ Demand ↑ ⇒ Rent ↑ and quantity of units rented ↑.**
- **Rent control below equilibrium ⇒ Shortage (demand > supply).**

---

### Example Visual (Conceptual)

![Rental market supply and demand curves with rightward demand shift and rent ceiling line](https://i.imgur.com/8nK9fK8.png)
*Alt text: Graph showing supply and demand curves for rentals, with a rightward-shifted demand and a horizontal price ceiling line representing rent control.*

---

Let me know if you want to plug in specific numbers, or if you want an explicit calculation for the shortage!

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