The revenue-maximizing rental rate is $950. At this rate, the demand for apartments increased to 1900 leaving 100 surplus apartments. The revenue was $1.81 million at this rate. When the rental rate, further decreased, the demand for flats increased, but the revenue also dropped. As the demand curve is an imaginary line showing the number of apartments demanded at a particular rate, it shows that the demand curve for two-bedroom apartments is a downward sloping curve with a negative slope.
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In other words, as the rental rate increases, the demand for apartments goes down as they become dearer. However, when their rates decrease, i.e. they become cheaper, the demand for apartments grows higher. Further, in the simulation, we have also observed that as the rental rate becomes lower, the revenue initially increases, and after one point, it starts declining. This provides an inverted bell-shaped revenue curve. Further, the surplus 100 apartments that are left at this rental rate can only be rented out if their rental rate is reduced, which will make the revenue decline.
2 years later, Susan recommended leasing out all the (i.e. 2500) apartments. The current rental rate at which the apartments are rented is $1100. At this rate, only 2050 apartments can be rented. However, all the 2500 apartments can be rented out at a rental rate of $1550.
The simulation included the demand curve at the next stage, and the new task was to identify the equilibrium quantity and rental rate. The rental rate at which the market assumed equilibrium is $1050, and the number of apartments rented is 2000. The demand for the apartments reduced at a rental rate above this, while supply increased creating surplus supply. At this rate, the supply and demand were equal.
First, there is a shift in the supply curve due to the increase in the number of available apartments from 2000 in Year 1 to 2500 in Year 2 and 3000 in Year 3. With the present situation, there is an increase in the demand for apartments with the advent of the new technology firm, which has brought in more people in the city. With increased demand, GoodLife has provided more apartments. Therefore, there is a rightward shift of the supply curve with more apartments to offer, and a rightward shift in the demand curve with more people demanding accommodations.
Therefore, with the increased population, demand for the apartments on temporary lease has made the demand curve shift rightward. However, it should be noted that the increase in the population increased the demand for apartments though it did not affect the supply. Thus, at any rate, more people demand apartments, which led to an increase in demand, and hence the demand curve shifted to the right. However, the number of apartments demanded is higher than the number of apartments GoodLife was willing to rent out at that particular rental rate. This causes the rental rates to increase, hence, causing an upward movement in the supply curve. Thus, the equilibrium is regained at the rental rate of $1300. At this rate, the number of apartments demanded and supplied is 2550.
With customer preference shifting towards detached homes, the demand for two-bedroom apartments reduces, inducing a leftward shift in the demand curve. In this situation, the supply remains unchanged with GoodLife which continues offering the same number of apartments, reducing the rental rate to $1300. This would help the company retain an equilibrium demand of 2250 apartments.
Thus, with an increase in income the preference of the consumers shift towards detached homes, reducing the demand for two-bed room apartments. This shifts the demand curve leftward, indicating a lower demand for apartments at a particular rental rate. Hence, the best possible solution for GoodLife was to reduce the rental rate to induce equilibrium. Hence, the rental rate was reduced to $1300.
Although Hal’s recommendation was to reduce the rental rate for the remaining apartments, it was wise to increase the prices. The reason behind it, there was a leftward shift in demand showing a lower preference towards two-bedroom apartments. This created the excess supply. On the other hand, GoodLife too had converted their apartments into condominiums, reducing their supply of available apartments. This created excess demand. Thus, the new equilibrium was determined at the $1475 rental rate and demand for 1900 apartments.
At a price ceiling of $1550, GoodLife would supply 2275 apartments. However, this would not create a demand for all the apartments supplied by GoodLife. There will still be excess demand for 875 apartments as well.
In real life, the company would have reduced the supply of two-bedroom apartments and transformed their offerings into smaller or luxury apartments, on which there was no rental ceiling.
The simulation provides intense knowledge regarding the movement of the price and its effect on demand and supply and understanding how it affects the price. Further, with changes in the price, the consumers are sensitive. However, in the case of a monopoly market, the price sensitivity of consumers is higher than in a perfectly competitive situation.