Supply and demand, in classical economics, factors

that are said to determine price, by correlating the

amount of a given commodity producers hope to sell
at a certain price (supply), and the amount of that
commodity that consumers are willing to purchase
(demand). Supply refers to the varying amounts of a
good that producers will supply at different prices; in
general, a higher price yields a greater supply.
Demand refers to the quantity of a good that is
demanded by consumers at any given price.
According to the law of demand, demand decreases
as the price rises. In a perfectly competitive
economy, the combination of the upward-sloping
supply curve and the downward-sloping demand
curve yields a supply and demand schedule that, at
the intersection of the two curves, reveals the
equilibrium price of an item. Theories of supply and
demand had their roots in the early 20th cent.
theories of Alfred Marshall, which recognized the
role of consumers in determining prices, rather than
taking the classical approach of focusing exclusively
on the cost for the producer as a determinant.
Marshall's work brought together classical supply
theory with more recent developments concentrating
on the utility of a commodity to the consumer (see
value). More recent theories, such as indifference-
curve analysis and revealed preference, offer more
flexibility to the supply and demand theories created
by proponents of marginal utility. The theory of
elasticity is significant as well: it shows how certain
commodities will bear a substantial rise in price if
there is not an equitable substitute available, while
other easily replaceable commodities cannot do so
without losing business to competitors. See also
competition.
Bibliography
See L. Klein, The Economics of Supply and Demand
(1983); K. Cuthbertson, The Supply and Demand for
Money (1985).

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Introduction
Over the past decade, prices in housing markets have
been particularly volatile
throughout the world. The housing market and its
derivatives, traditionally viewed
as low-risk and defensive markets, were at the heart
of the recent global financial
turmoil, triggered by the US subprime mortgage
crisis and the Lehman Brothers
crisis. As such, examining the factors that impact
housing prices, as well as the
influence of housing price changes on other related
markes, is important.
The housing market has always been highly volatile,
and housing prices are
difficult to estimate and forecast. Housing can be
used both as an expensive form
of consumption to satisfy the residential needs of the
public and as an investme

In terms of investment, housing can either be leased

out to earn rental revenue or
sold for capital gain. Several factors affect housing
prices because housing is a
special asset class that simultaneously possesses
investment demand and con-
sumption demand. Thus, determining whether
housing price movements reflect
fundamentals or are deviations from the
fundamentals that produce a market
bubble at any given point in time is difficult.
1
The earliest investigations of housing prices
involved derivations of traditional
supply and demand models (Whitehead, 1971;
Bowden, 1980). These models
incorporated factors that universally affect housing
supply and demand, including
housing prices. The equality of supply and demand
in market equilibrium makes
the obtainment of a function for equilibrium housing
prices possible. This func-
tion is used in the published literature to observe the
long-term relationship
between housing prices and relevant factors, to
determine whether housing prices
deviate from fundamentals (e.g. Hendry, 1984;
Drake, 1993; Holly and Jones,
1997; Malpezzi, 1999; Meen, 2002; Goodman and
Thibodeau, 2008; Mikhed and
Zemc
ˇík, 2009; Clark and Coggin, 2011; Tsai and Peng,
2012).
However, this type of analysis cannot completely
capture dynamic movements
in housing prices. Theoretical models constructed by
Janssen
et al.
(1994) and
Chen and Tsai (2007) posit that housing supply
exhibits a lag. The lead/lag
relationships among variables should, therefore, be
considered. For example,
housing prices should affect future housing supply
because developers decide
whether to increase housing supply based on current
housing prices.
In analyzing housing demand, numerous studies
have focused on rent/buy
decisions made by the public (e.g. Goodman, 1988;
Haurin and Kamara, 1992;
Grange and Pretorius, 2000; Dusansky and Koc,
2007). Such scholars have
examined two substitutable choices available to the
public when satisfying
demand for housing; namely, renting and buying a
home. These studies have
focused on cost changes between these two options
and the substitutions between
the two markets. From this perspective, housing
prices should also be related to
rental prices.
This paper selects three price indices for the same
market. While the construc-
tion cost index (CCI) affects housing supply, the
CCI is also affected by housing
prices because this index is based on the raw
material market for housing and is,
therefore, affected by the derived demand for
housing. The rental price index
(RPI) affects housing demand and can also be said to
represent the price of a
substitute good for housing demand. However, the
RPI is also affected by housing
prices because the rental and the home ownership
markets are intimately con-
nected. Finally, the housing price index (HPI) is
affected by both supply and
demand, while also affecting supply and demand for
housing. The present study
looks into the relationships among these
hypothetically closely-linked indices by
analyzing the linear/nonlinear and long-term/short-
term relationships between
them.
This paper adopts a new perspective to examine
whether markets relevant to
housing supply and demand affect housing prices
and whether housing prices
affect these markets. This study also examines the
points where the forces are
more and less closely correlated. Despite the
importance of this topic, few schol-
ars have explored the issue in depth. The results of
this study provide an empirical
explanation as to whether the fundamentals of the
housing market affect housing
prices and whether housing prices are driving factors
that affect other related
markets. The findings should provide governments
with a reference for observing
the stability of the housing market.

References
Tsai, I 2012, 'Housing Supply, Demand and
Price: Construction Cost, Rental Price and
House Price Indices Housing Supply, Demand
and Price: Construction Cost, Rental Price and
House Price Indices', Asian Economic Journal,
26, 4, pp. 381-396, Business Source Ultimate,
EBSCOhost, viewed 15 April 2017.

A measure of the responsiveness of

demand
to a change in
price
. If demand changes by more than the price has
changed,
the good is price-elastic. If demand changes by
less than the
price, it is price-inelastic. Economists also
measure the
elasti-
city
of demand to changes in the
income
of consumers.

'Price elasticity' 2004, Essential Economics, p. 204,

Business Source Ultimate, EBSCOhost, viewed 15
April 2017.

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