Considering a new business that deals in construction and selling of real estates, there are many decisions to make during and before sales. Microeconomic analysis is a technique used to determine how the actions and decisions of a business or organization affect the country’s economy. Microeconomic analysis describes how individuals make financial decisions depending on the income they earn and the price of the products they consume. The study of microeconomics covers the levels of production and pricing. However, there are two different methods used in the microeconomic analysis process (Douglas, 1982).
The commonly used method is the analysis of the nation’s economy. Analyzing the economy of a particular nation provides a clear picture of the trends and factors affecting the economic forces of a nation or country. These factors include inflation, interest rates, borrowing rates, and the employment level. The other method used in microeconomic analysis is the review of individuals and business firms that contribute to the economy of the country. However, the data of microeconomic analysis could generate information from the people who consume and the companies that produces services and goods. The study of individuals that make up the economic structure could show how they directly or indirectly affect the economy.
In microeconomic analysis, there are variables that determine the effect of products, services, and business firms on the economy of a particular country. These variables include demand, supply, market structure, and nature of competition. Other variables that determine the effect of business or product in the economy include elasticity of demand, prices, and production factors. Most of these variables apply to the micro analysis of the real estate business. Real estate enterprises and firms influence the economy and life of citizens in America. The success of real estates has seen its level of impact on the economy and power of the lifestyle of American citizens’ increase.
Mortgage rates depend on the speed at which the business firms lend investment packages. Subsequently, with increase or decrease in mortgage rates, the real estate business significantly impacts the general economy. On the other hand, the actual estate market regulates and monitors the rent charges in a particular country. There are three major factors that real estate investors assess before engaging in buying and selling activities. These three factors determine the level of demand for real farms and houses (Seng Lai, 1981).
The factors include investments, prices, and lending rates. Investing in property involves a large number of starting capital and revenues. In the process of buying and selling, the seller pays a certain amount of tax to the government as required by the law. Therefore, investments in the real estate sector directly impact the economy of America in different ways. Consequently, opportunistic entrepreneurs buy shares from these business firms (also known as Real Estates Investment Trusts) to earn a living. The investors acquire properties at a lower cost and sell for a profit. Also, the investors can buy the real estates and rent them to tenants so that they can gain income to support their stakeholders.
All businesses have a trend curve for on-peak and off-peak occasions; the investors in the real estate business use these trend to determine the level of demand on real estates. During festive seasons, the country floods with tourists from other countries and within the United States. During this time, the actual estate business is believed to be on-peak (Chakravarty, 2002). The public demand for renting houses and buying houses increases significantly throughout the country. Real estate demands can reflect the amount of public offerings produced by the investors to the stock exchange.
The other factor that will determine the need for the real estate services is the pricing. Product pricing is directly proportional to the demand of a commodity. Precisely, as the demand decreases, then the price of the product or service increases too. When the price of renting, buying, or selling real estate hikes, then the investors will understand it is not the right time to invest in the property. From basic economics, a smooth demand curve shows the relationship between the price and demand of a commodity (Varian, 2000). However, in the real estate business, things are different. A hike in prices means that the demand is on-peak, and the investors should act immediately. An increase in price for real estate services means that the actual estate industry has been flooded with customers. An example of this could be seen during the summer season when most of the citizens are on holiday. The pricing of real estate services and products increases significantly due to the high demand.
The demand curve shows how the price is elastic to the demand. Therefore, the producer can change the amount in response to a change in demand. On the other hand, the consumer can modify the application in response to the change in price. This way, the investors in the real estate business will understand the principles of demand and pricing for their services. Many market structures used in industries are well known. Within this structures, there are segments that are a component of an important market structure. For example, there are graduations of the oligopoly market structure. These graduations of the oligopoly structure include loose oligopoly, dominant oligopoly firm, and tight oligopoly. In the case of real estates, the market structure closely resembles one of the oligopoly structure segments (Coiacetto, 2006).
According to Mackenzie, Betts, and Jensen (2011), when the price of building materials and renting real estate drops, then the demand or quantity demanded will rise. Consequently, an increase in the demand will affect the supply chain. Therefore, the amount provided by the firms will fall. In the microeconomic analysis process, the directions of these changes are equally significant and significantly contribute to the interpretation of the market trend.
The concept of elasticity plays a significant role in the measurement of these changes. However, most economists focus on the demand more than the price or the quantity. When the demand is high, the investors run out of time and resources to satisfy their client hence a fall in the supply of commodities. An increase in demand will ensure that the quality of the real estates will gradually reduce, rendering the business a low-quality investment option. The elasticity of demand and supply is determined by the availability of a substitute. The real estate industry is flooded with small companies that could settle for little income. The behavior of these businesses significantly determines the elasticity of the demand and the supply.
A second factor that affects elasticity in real estate business is the amount of money investors spend on building or acquiring some of the houses. The more they spend on these items, the higher the prices of renting and buying the real estate facilities. Time is another factor that affects elasticity. When the purchasing a property facilities seems to be expensive, clients will opt for cheaper houses; next time they will want to purchase them. Elasticity is expressed in terms of a flatter demand curve, and this curve could also be more horizontal compared to the average demand curve.
The structure of a market is primarily categorized by the terms of the buyer and seller. However, the essential elements of a market structure are the size of the firms and the distribution of the firms in the market structure. Other minor items that classify a market structure include product differentiation, entry condition, market shares, and industry concentrations. The real estate business falls under the oligopoly market structure. According to numerous research in economics, it is believed and proven that the more an investor spends on an item, the more elastic the demands will be.
Competition on the real estate is steep and can significantly close out on beginners and other small businesses. Residential real estates are in high demand and as a result, the industry is fiercely competitive. The National Association of Realtors (NAR) suggests that real estate profits and income are entirely determined by the consumers and the producers. On the other hand, the Government Accountability Office (GAO) indicates that the real estate commissions remain the same across markets. The real estate commission, however, does not reflect the cost of selling a house.
Oligopoly market structure possesses three notable characteristics that distinguish it from other market structures. These features underlie typical market behaviors including individual actions, firms’ actions, and decision making. One of the most important aspects to note is that oligopoly is an industry or market structure that a small number of large firms dominate. This component classifies the real estate business an oligopoly market structure. The government and few other companies have successfully established themselves in the real estate business. Other small businesses do not perform well in this kind of business (Krauss and Johnson, 2009).
The number of firms in an industry does not contribute to the classification of an oligopoly market structure. The oligopoly structure has a large number of well-established companies. However, few of the firms are relatively large in the real estate business industry. The supply of housing facility mainly comes from the government and a few other established companies. Like every other business, the real estate industry is guarded and regulated by the government. The ministries of housing contain and maintains the growth and development of the industry. Laws and regulations influence the trend of business in the real estate sector (Ferrell and Fraedrich, 2009). The firms investing in real estates are cornered in some ways by the laws and regulations of the government. The laws limit and regulate the number of residential real properties. Also, the authorities set rules to determine the quantity of goods available for sales.
On the other hand, the products can distinguish the type of market structure and significantly helps to classify businesses into appropriate structures. The product characteristic is the description of the primary commodity produced or manufactured in a particular company. The real estate business fall under oligopoly market structure since it all the companies involved produce the same products, which is residential and rental real estates.
The real estate industry is fiercely competitive because the companies involved produce similar products with a little uniqueness. Therefore, marketing plays a significant role in the success of a real estate firms. The most important way of achieving success in the real estate market industry is through marketing and advertising. Also, companies in the real estate sector retain and attain market control through entry barriers. It is quite difficult to start a business in the deal in the residential property because of the fierce competition in the market industry. Entry Barriers are the key elements that separate the oligopoly market structure from other market structures.
A small business that is new in the real estate industry should consider working for a well-established real estate company before going into the company by itself. The partnership is key to success in the real estate investment schemes. Another factor that accelerates success in the real estate business industry is the acquiring loans from banks and other financial helpers. Starting a real estate business requires an enormous amount of money for purchasing building materials, paying for labor, and other services. A business firm dealing with real properties should ensure that active and relevant analysis of the company trends are undertaken.
Chakravarty, S., 2002. Elements of Microeconomics. Allied Publishers PVT. Limited, Mumbai. pp. 436.
Coiacetto, E., 2006. ‘Real Estate Development Industry Structure: Is it Competitive and Why?’ no. 10, pp. 3-10.
Douglas, E., 1982. Intermediate Microeconomic Analysis: Theory and Applications. Prentice- Hall Publishers, New Jersey.
Ferrell, C & Fraedrich, J., 2009. Business Ethics: Ethical Decision Making and Cases. South- Western Cengage Learning, Ohio.
Krauss, M & Johnson, H., 2009. General Equilibrium Analysis: A Micro-Economic Text. George Allen & Unwin Ltd., New Jersey.
Mackenzie, D, Betts, R and Jensen C., 2011. Essential of Real Estates Economics, Cengage Learning, Boston.
Seng Lai, K., 1981. Essential Elements of Microeconomic. Pan Pacific Publications Pte. Ltd., Singapore.
Varian, H.R., 2000. Microeconomic Analysis: Exercises and Applications. John Wiley & Sons Publishing Company, New York.