The article called “Demand, supply, and their interaction on markets, as seen from the perspective of evolutionary economic theory” by Richard R. Nelson explores the neoclassical perspective on the curves of supply and demand, the prices within markets, and the allocation of resources.
Firstly, the author mentions that the prices within markets used to be determined from the point of view of supply and demand curves. Secondly, Nelson (2012) claims that the contemporary view of the price theory formulation carries a neoclassical character. In other words, the contemporary researchers focus on such determinants of prices as income levels in various regions and outputs.
Thirdly, Nelson (2012) argues that such perspective is unfortunate since the economies are in constant movement and thus finding the equilibrium or optimizing their ever-changing nature is impossible. Finally, the author finds the assumption that the dominant sets of prices and the rates of supply and demand are the determinants of the economic equilibrium problematic but useful analytic concepts.
The correlation of the price change, supply, and demand is often discussed within the housing market that is sensitive towards the rates of unemployment (Branch, Petrosky-Nadeau & Rocheteau, 2014). In fact, the assumption is that prices for housing in wealthier regions are more unemployment-sensitive than those of the lower income regions (Qingyu, 2010).
Besides, the paper by Vermeulen and Ommeren (2009) proves wrong the belief that the dwellers of the high-unemployment regions tend to have higher salaries finding an empirical evidence that “wages correlate negatively to unemployment, with an elasticity of − 0.10” (p. 1). As a result, the equilibrium in the wage rates and the region unemployment tendencies is compensated in the market for housing.
The income-based evaluation of the prices matches the neoclassical approach to the price changes mentioned by Nelson, as well as his suggestion to seek for alternative views. In turn, this point of view matches with the definition of economics presented by O’Sullivan, Sheffrin, and Perez (2014) that refers to this study as the search of choices in the areas with scarcities.
The compensation in the housing market in the regions with high unemployment is one way to find the equilibrium that Nelson states is impossible to maintain in the economies that chance all the time. The supply and demand variables in the housing market are not the basis of price formation, yet, as mentioned by Nelson (2012), they are useful determinants.
The housing prices and the unemployment rates in the United States of America are closely related. In fact, the work of Rupert and Wasmer (2012) reflects that housing is one of the main causes of the population mobility that in the US is estimated as much higher than in the European Union. Besides, the dominant prices in the regional housing markets tend to determine the willingness or unwillingness of the potential employees to accept or reject job offers Rupert & Wasmer, 2012).
As a result the supply of housing does not only determine the level of unemployment in the United States but also its duration and vacancy creation. The prices for homes are associated with the supply of new and existing homes, where the owners of the soon-to-be-on-sale homes are more likely to sell their property for the lower price.
Moreover, the mechanism creating the higher demand for houses such as the lower mortgage in the regions with low income and high unemployment rates is likely to lead to the increase in the home sales thus minimizing the number of supplied homes throughout a certain period of time. In turn, the reduced housing supply would shift the equilibrium and lead to the growth of the housing prices in the region.
As reflected in the population of the United States and its mobility – the employed individuals tend to be motivated by the convenience and placement of housing (better supply) as this is the areas of scarcity for them, whereas the unemployed population is moved by the prices for housing in the areas with the lower demand.
In my opinion, Nelson’s point of view of the price change and its determinants is very strong. Income distribution and the level of financial stability and independence of the population are reflected in their paying capacity.
As a result, the prices in the regions where the population is better paid will be higher, because higher demand leads to the supply shortages which, in turn, maximizes the prices of the fewer available commodities of a particular kind (in our case – homes). That way, supply and demand are very significant price determiners, yet income distribution is the root cause.
Reference List
Branch, W., Petrosky-Nadeau, N., & Rocheteau, G. (2015). Financial frictions, the housing market, and unemployment. Web.
Nelson, R. (2012). Demand, supply, and their interaction on markets, as seen from the perspective of evolutionary economic theory. Journal Of Evolutionary Economics, 23(1), 17-38.
Qingyu, Z. (2010). Regional unemployment and house price determination. Web.
Rupert, P., & Wasmer, E. (2012). Housing and the labor market: Time to move and aggregate unemployment. Journal of Monetary Economics, 59(1), 24-36.
Vermeulen, W., & Ommeren, J. (2009). Compensation of Regional Unemployment in Housing Markets. Economica, 76(301), 71-88.