Starting from equilibrium, market demand for homes in an area increases while supply stays the same. Other things equal, what tends to happen to price?
Correct Answer
B) It tends to increase
From equilibrium, an increase in demand with constant supply tends to raise price; an increase in supply with constant demand tends to lower it. Both sides of the market interact to determine value.
Why This Is the Correct Answer
Option B is correct because, from an equilibrium position, an increase in market demand while market supply remains constant tends to increase price. More buyers competing for an unchanged supply of homes puts upward pressure on price.
Why the Other Options Are Wrong
Option A: It tends to decrease
Option A is wrong because a price decrease tends to follow an increase in supply with constant demand, or a drop in demand. Here demand increased while supply stayed the same, which tends to push price up.
Option C: It stays the same, since supply did not change
Option C is wrong because price does not stay the same just because supply did not change. Price reflects the interaction of supply and demand, so a change in demand alone can move price.
Option D: It cannot change until new construction begins
Option D is wrong because price does not have to wait for new construction to begin. Price can respond right away to higher demand against existing supply; new construction is a later supply response.
More buyers, same homes
More buyers chasing the same homes pushes price up; more homes for the same buyers pushes price down.
How to use: Use this picture to predict the direction of price on any supply-demand shift question.
Exam Tip
Identify which side moved and which held steady; demand up with supply fixed points to a price increase.
Common Mistakes to Avoid
- -Assuming price is fixed unless supply changes
- -Reversing the effects of demand and supply shifts
- -Believing price cannot move until new construction starts
Concept Deep Dive
Analysis
This question tests the basic interaction of supply and demand. Starting from equilibrium, if demand rises while supply is constant, buyers compete for the same supply, so price tends to rise.
Background Knowledge
Price in a market results from the interaction of supply and demand. From equilibrium, rising demand with constant supply tends to raise price, and rising supply with constant demand tends to lower it. Because real estate supply adjusts slowly, short-run demand changes often show up first in price and marketing time.
Real-World Application
A major employer opens a new facility, and household demand in a nearby town rises while the housing stock is unchanged. The appraiser sees multiple offers and rising sale prices among recent comparables and reflects the upward trend in the market conditions analysis.
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