To break it down even further, economics has developed the law of supply and the law of demand. Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy (Heakal, 2012). Without demand for a good, there would be no need for the supply of the good. Supply and demand is based on how much people are willing to spend to obtain a good. With higher demand, it would drive the price of a good up, which would prompt suppliers to produce more goods. Suppliers need to keep up the supply inventory to keep up with demand, and they would want more supply to sell at the higher price. Inversely, lower demand would drive the price down to entice people to want to ...view middle of the document...
This is when the market is at its most efficient. Price, therefore, is a reflection of supply and demand (Heakal, 2012).
These trends can be seen in full affect in regards to the housing market in the United States, where declining sales seems to be continuing. Demand for new homes is stagnant despite record low mortgage interest rates, and competition from foreclosures continues to cloud the sector (Hauser, 2011). With more foreclosed homes in the market, there is no need for new homes to be built. The number of permits issued to builders of single-family houses has also declined (Hauser, 2011). There is low demand and the data reflects that the prices for the available homes are steadily declining as well. The median sales price of a new home was $222,000 in July, also down from the previous month (Hauser, 2011). Yet, despite the price drop and no new supply of homes in the market, the demand for homes is slow at recovering. In fact, the level of inventories in recent months this year has been the lowest recorded since December 1967 (Hauser, 2011).
According to the laws of supply and demand, the market will self correct and the demand for homes will increase back to equilibrium because prices are at a historic low. The low demand for homes has lowered the need for supply. Yet, the supply of homes is still increasing due to more foreclosed homes entering the market. This is creating a shift in the supply curve, while keeping prices relatively the same. There is now excess supply available in the market. This change also affects where the equilibrium of the supply and demand of homes will be. Hence, if the market does correct itself, it will be a slow recovery process.