Analyzing occupancy rates

As you can see from the article in the prior problem, "Rents Hit All-Time Highs amid Job Growth and Low Vacancy Rates," some people move out as a result of rent increases, while others are ready to pay an even higher rent. Rent control adds yet another aspect by setting a ceiling on what the rental price can ultimately rise to. The supply and demand model can be used to illustrate the mechanism that leads to all these different market outcomes.

Consider the market for rental properties in Los Angeles and Orange counties in Southern California. Suppose that while average earnings increased by about 10% in Los Angeles and Orange counties, the average rent has increased by 20%. (Assume for a moment that there are no rent control regulations.)

Adjust the following graph to illustrate the rent increaseby either using the black point (cross symbol) or by shifting the supply and demand curves.

Hint: Determine whether this scenario leads to a shift in the demand/supply curve or a movement along the demand/supply curve.

The Market for Rental Properties in Los Angeles and Orange Counties Demand Supply New Rent Vacancies Demanded with Price Control Vacancies Supplied with Price Control0100200300400500600700800900100030002700240021001800150012009006003000RENTAL PRICE (Dollars per month)QUANTITY (Number of vacant units)D1D2S1S2

As a result of the 20% rent increase, the number of vacant units demanded decreases to

units.

Adjust the previous graph to show the effect of the increase in earnings.

Hint: Determine whether this scenario leads to a shift in the demand/supply curve or a movement along the demand/supply curve.

The increase in earnings results in a new equilibrium rent of

per month and a new equilibrium number of vacancies of

units.

Now suppose that the state of California introduces rent control by setting the maximum rent at $1,800 per month.

On the previous graph, use the grey point (star symbol) to indicate the number of vacancies demanded. Then use the tan point (dash symbol) to indicate the number of vacancies supplied.

As a result of rent control, there is a of

vacant units in the market.