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Lecture 3

REAL 1820 Lecture Notes - Lecture 3: Capitalization Rate, Demand Curve, Economic Equilibrium

2 pages22 viewsFall 2017

Department
Real Estate and Housing
Course Code
REAL 1820
Professor
Jian Zhao
Lecture
3

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Key Terms
Market A mechanism through which goods and services are exchanged among different
participants.
- Mall, EBay, Real Estate Market
Submarket Sub-division within a market.
- Property Type: single family markey, apartment market
- Geography: Cities, towns, communities
For any market, there should be a price for ownership. Price is equal to the rent divided by the
capitalization rate. The capitalization rate is the rate of return for real estate investment. Rent is
the price of the occupancy rights for a specific period of time.
A Basic Model of Supply and Demand
Supply and demand models tell us how the forces of supply and demand are able to deterind
the price of a good or service in a market.
Example: The scalping market for sports tickets. How is the ticket price determined in this
market?
The demand curve shows how much of a good or service consumers want to buy at a given
price.
The law of demand suggests that a higher price of a good, other things equal, leads people to
demand a smaller quantity of the good.
Supply schedule shows how much of a good or service would be supplied at different prices.
Supply curves graphically show how much of a good or service people are willing to sell at any
given price.
When you put the supply curve and the demand curve together on a graph, we are able to find
the market equilibrium. When the two curves cross, at that point, we can see the equilibrium
quantity, where the quantity demanded equals the quantity supplied. The price corresponding
to the point where the curves meet is called the equilibrium price or market-clearing price.
A Shift of the Curves
If the demand curve shifts to the right, that means that there is a surge in demand. If the
demand curve shifts to the left, it represents a decline in demand.
If the supply curve shifts to the right, people will be more willing to sell and supply, but if the
curve shifts to the left, this means that they are less willing to sell and supply that good or
service. When this happens, there is a shift in the equilibrium.
Rent: The price of rent in a real estate market is represented by a demand curve. As price/rent
decreases, space demanded increases and vice versa.
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