IF1105 Microeconomics
Tutorial Topic 2 Demand and Supply
Tutorial Essay Question
Housing and Rent for Students
Using the concepts of demand and supply, analyse why student rents in major UK
cities have risen sharply in recent years.
In your answer, consider the role of demand-side factors (student numbers, income,
preferences for location) and supply-side constraints (planning rules, construction
costs, limited housing stock).
Evaluate the extent to which the housing market is price elastic on both the demand
and supply side.
[I recommend you practice writing your response, at the very last writing out full
sentences for key points and arranging them logically in order, as this will help prepare
you for the exam and also improve your ability to explain your reasoning verbally.
The aim is to teach you how to approach these types of questions using economics.
Use full sentences to show your understanding and to develop well-structured
arguments — this is also a valuable transferable skill for future employment.
In the tutorial, the tutor will guide you through the answer verbally.
Guided solutions (rather than full model answers) will be available on Moodle.]
Guide to answering question
Knowledge and Understanding
Key definitions
Demand: The quantity of housing that students are willing and able to rent at different
prices over a given period.
Supply: The quantity of housing that landlords or developers are willing and able to
provide at different rent levels.
Equilibrium rent: The rent level where the quantity of accommodation demanded
equals the quantity supplied.
Law of demand: As the price (rent) rises, the quantity demanded falls, ceteris paribus.
Law of supply: As the price (rent) rises, the quantity supplied increases, ceteris
paribus.
These basic laws underpin how market rents are determined for student housing in
the UK.
1
Application to Student Housing Markets
1. Demand-side pressures
Rising student numbers: Increased university enrolment, including a surge in
international students after COVID, has shifted the demand curve rightward (from D₁
to D₂).
Preferences for location: Students prefer to live close to campus or city centres,
increasing demand for centrally located private housing and purpose-built student
accommodation (PBSA).
Income and ability to pay: Access to student loans and parental support means
students can pay higher rents, even during a cost-of-living crisis.
Preferencs for convenience: Students often choose convenience over cost, making
their demand relatively price inelastic.
[Link]-side constraints
Planning restrictions: Tight planning controls and lengthy approval processes limit new
housing construction.
Rising construction and financing costs: Labour shortages, inflation, and higher
interest rates push up building costs, shifting the supply curve upward (S₁ to S₂).
Fixed housing stock: In the short run, housing supply is almost perfectly inelastic —
there’s a fixed number of available rooms or flats.
Limited land availability: Urban land is scarce, especially in major cities like London,
Manchester, and Bristol.
Diagrams
S ort Run Demand and Supply
b
2
1
O 1
2
ong Run Demand and Supply
b
2
1
O 1
Diagram 1: Rising Demand and Inelastic Supply
Demand shifts right from D₁ to D₂ due to higher student numbers.
Supply (S₁) is steep (inelastic), meaning quantity can’t expand quickly.
Equilibrium rent rises sharply from P₁ to P₂, with only a small increase in quantity (Q₁
to Q₂).
This explains why rents increase sharply when supply is unresponsive.
Diagram 2: Long-run Adjustment
In the long run, new halls or PBSA developments shift supply gradually to S₂.
Price falls slightly from the short-run peak (P₂ to P₃), and quantity expands from Q₂ to
Q₃.
The market partially adjusts, as seen in the growth of firms like Unite Students and
Empiric.
3
Furt er points t at could ave been mentioned.
Consumption adjustment: some students respond by sharing flats or moving further
from city centres, but many have limited alternatives.
Income inelasticity: Although students have limited budgets, loans ensure minimum
housing expenditure, so rent rises don’t eliminate demand.
The model helps explain rising rents, but it simplifies reality: markets are segmented.
Segmentation: The student housing market is divided (university halls, Purpose Built
Student Accommodation (PBSA), shared accommodation (House in Multiple
Occupation - HMOs), each with different elasticity levels.
Policy influences: Rent caps, housing grants, or planning reforms could shift supply
and moderate rent increases.
External shocks: Higher mortgage rates and inflation also push up landlords’ costs,
feeding through to rents.
Overall, the combination of rising demand and inelastic supply explains why student
rents have increased significantly in recent years.
4
Online Tutorial Questions
Q1. Explain the role of prices in a market.
Answer: Markets use prices to allocate goods and services. Prices act as a selection
device that encourages trade between the sellers who can produce goods at relatively
lower costs and the buyers who place a relatively high value on the goods.
Q2. Is eBay a market? why?
Answer: Economists define a market as a group of economic agents who are trading
a good or service, and the rules and arrangements for trading. It need not have a
specific physical location. eBay is a Web-based goods market that operates wherever
there's a computer and an Internet connection.
Q . Differentiate between a change in demand and a change in quantity demanded.
Answer: A change in demand refers to the change in the quantity of a good purchased
due to changes in any factors other than price. These factors may include a change in
income, tastes and preferences, future expectations, or a change in the number and
scale of buyers. A change in demand is graphically represented by a shift of the
demand curve. In contrast, a change in quantity demanded refers to a change in the
quantity of a good purchased due to a change in the good's price, other things
remaining the same. Graphically, a change in quantity demanded is represented by a
movement along the same demand curve.
Q4. Fill in the missing information in the table below.
The formula for price elasticity of demand is as follows:
Proportionate (or %) change in quantity demanded
Proportionate (or %) change in price
For the final column use the formula: d/mid d /mid . We use the midpoint
method of the calculation of the price elasticity because it avoids direction bias and gives
a single, consistent elasticity value for a price change.
In any assessment on this module, it will be made clear whether you should use the
mid-point method in calculations involving elasticities.
uantity demanded rice Total consumer Elastic or inelastic rice elasticity of
(000s) (£) expenditure demand demand
7 1 91
9 11
elastic –1.5
99
11 9 unit elastic –1
99
1 7 inelastic –0.67
91
5
Q5. Using the mid-point method, what is the formula for income elasticity of demand?
Answer
Qd/mid Qd Y/mid Y
(where Y is income)
Q6. Imagine that a social influencer endorses a particular brand of gym wear. In
particular, they state that the light breathable material keeps moisture away from your
body during exercise leaving you feeling dry and more comfortable.
What do you think would happen to the demand curve for another brand of gym wear?
Consider both the direction of the shift and the effect on elasticity. How will this affect
the pricing policy and sales of this other brand?
Is there a role for government intervention in the form of regulation?
[Regulation: Rules and laws imposed by government or an authority to influence or
control the behaviour of firms and individuals in order to protect consumers, promote
competition, and address market failures].
[hint: read Sloman et al (2022) Box 2. : Social media influences and their effect on
demand curves pp. 59]
Answer
The effect of a social influencer endorsement depends on credibility factors such as
perceived expertise, trustworthiness, audience size, and whether the promotion is
disclosed as paid.
If the influencer is highly trusted with a large following, the endorsement will likely
increase demand for the endorsed brand, drawing consumers away from rival gym
wear. This causes the demand curve for the competing brand to shift leftwards (a fall
in demand at each price).
The endorsement also increases the perceived substitutability between brands. As
consumers become more willing to switch, the demand for the rival brand becomes
more price elastic. This means that if the competing firm raises its prices, it risks losing
more customers than before.
For the competing brand, this shift has clear implications:
Pricing policy: Reduced pricing power. To retain customers, the firm may need to lower
prices or offer promotions.
Sales volume: Likely to fall, both because of the leftward demand shift and greater
sensitivity to price changes.
Strategic response: Investment in product differentiation (e.g. superior features or
quality) or marketing may help counteract the influencer’s impact.
6
If, however, followers suspect the endorsement is purely paid promotion, the effect will
be weaker.
Yes, regulators such as the UK Competition and Markets Authority require influencers
to disclose sponsored posts to reduce misleading advertising.
Q7. The following figure shows the demand and supply curves for USB flash drives
at different price levels. D is the demand curve, and S1 is the initial supply curve.
a) Refer to the figure above. When the demand curve for flash drives is D and the
supply curve of flash drives is S1, the equilibrium price is ________.
A) $
B) $4
C) $5
D) $7
Answer: C
Equilibrium is at the D–S₁ intersection (Price = $5, Quantity = 40).
b) Refer to the figure above. When the demand curve for flash drives is D and the
supply curve of flash drives is S1, the equilibrium quantity is ________.
A) 10 units
B) 20 units
C) 40 units
D) 60 units
Answer: C, From the intersection point, Q = 40 units.
7
c) Refer to the figure above. When the demand curve for flash drives is D and the
supply curve of flash drives is S1, what is the surplus in the market if the price is $7?
A) 10 units
B) 20 units
C) 50 units
D) 60 units
Answer: C
At $7, Qᵈ ≈ 10 (on D) and Qˢ ≈ 60 (on S₁). Surplus = Qˢ − Qᵈ = 60 − 10 = 50.
d) Refer to the figure above. When the demand curve for flash drives is D and the
supply curve of flash drives is S1, what is the shortage in the market if the price is $4?
A) 0 units
B) 10 units
C) 20 units
D) 40 units
Answer: D
At $4, Qᵈ ≈ 60 (read off D) and Qˢ ≈ 20 (read off S₁). Shortage = Qᵈ − Qˢ = 60 − 20 =
40 units.
e) Refer to the figure above. If the supply curve for flash drives shifts from S1 to S2,
with no change in the demand curve, the new competitive equilibrium price is
________.
A) $
B) $4
C) $5
D) $7
Answer: D
The D–S₂ intersection occurs at about $7.
f) Refer to the figure above. If the supply curve for flash drives shifts from S1 to S2,
with no change in the demand curve, the new competitive equilibrium quantity is
________ units.
A) 10
B) 20
C) 40
D) 60
Answer: A
At the D–S₂ intersection, Q ≈ 10 units.
Q8. Is there any truth in the saying that the price of a good is a reflection of its quality?
8
[hint: use economic reasoning to answer this question].
Answer
Yes (albeit not always). There are two reasons:
(i) Goods of a better quality often cost more to produce – because better quality
materials are used, or more time is taken in their manufacture. This will lead to a supply
curve vertically higher than for inferior quality goods.
(ii) Goods of better quality are in higher demand than inferior quality ones at any
given price. The demand curve is therefore further to the right.
The combination of (i) and (ii) produces a higher equilibrium price.
Sometimes, however, consumer ignorance may lead to people being prepared to pay
high prices for inferior quality goods