ECONOMICS

Business and Management Economics

Business and Management Economics

Assignment

Question 1

Why do many people buy larger houses when they retire and their own children leave home?

In the past mostly people were keener to move to smaller houses in warmer climate after getting retired. However the pattern has now changed and couples are more likely to sell their family homes and later purchase a larger one. Thus, it is significant to determine what has resulted in this shift?

A major reason for this change has been recognized as changes in family structure. Historically the pattern was to have at most four living grandparents. However with an increase in the rate of divorce and remarriages, it has been witnessed that it has become common that children have more than six living grandparents and step-grandparents (Carr, 2012). With an increase in grandparents and no change in the number of grandchildren, thus, there has been an excess demand of grandparents visiting their children. In order to satisfy their demand for visits with their grandchildren grandparents are in effect paying higher prices to purchase larger houses (Lipsey & Chrystal, 2011, P. 229).

While working individuals earn money some of which is consumed, however the rest is saved by individuals, and these savings are later invested by individuals in purchasing houses for their long-term security (Ross, 2011). As investing in property is essential since with inflation prices are tend to fluctuate frequently however prices of property are tend to increase. Therefore to secure their investments after retirement individuals invest their money in buying larger homes (Mankiw & Taylor, 2006, Pp. 695- 705). The ability of purchasing larger houses are also impacted by the interest rates that prevail in the economy, therefore, people living in economies, where interest rates are low, will be reluctant to invest save their money and would rather borrow money at lower cost and invest purchase homes. Thus interest rates play a greater role in an economy to determine the need for consumption and savings. However the most significant factor in determining the reason for the change is the structure of family (Ross, 2011).

Perfect Competition and Monopoly

Competition is essential for motivating producers to produce output at lower cost and supplying it to the market at lower price with better quality to gain competitive advantage (Ross, 2011). However, creation of monopoly gives power to one single producer that determines the price and the quantity supplied to the market. Perfectly competitive firms do not have market power, they are the price takers and therefore result in most efficient resource allocation, and on the other hand monopolies possess the most market power, thus resulting in least efficient outcome (Carr, 2012). Monopolies are a contestable market where there is a single producer, producing products that do not have close substitutes and do not face competition from other firms in the market. Consequently there are no barriers to entry that prevents firms from entering the industry (Mankiw & Taylor, 2006, Pp. 695- 705). Thus monopolies have the power to control market ...