6.

a) With reference to Figure 1, explain one possible reason for the differences in price elasticity of
supply of new housing between countries.

 Define Price elasticity of supply – percentage change in supply / percentage change in price
 In US, if the house price goes up, there will be a greater increase in the supply of houses –
that more people are willing to build the houses in the US compared to the US.
 Use the data.
 One reason being that geographically, there is less space in the UK and the Netherlands
compared to the US. The population density is a lot greater/denser in the UK and the
Netherlands compared to the US, as there are less cities and space, therefore making it much
easier for the US to build houses, due to less restrictions and easier for the government to
approve the construction.

b) With reference to Extract A, assess the likely impact of the Help to Buy scheme on the market for
rented properties in the UK (5)

 Paragraph 1 (negative impact):

o The rental market would shrink – as more people are likely to buy a house
o These are substitutes goods – which means that if there is an increase in demand for
one good, the demand for the other good will most likely to decrease
 Paragraph 2 (Positive impact):
o However, this may not occur.
o The Help to buy scheme will expire by 2017.
o If the deposit goes up to 20%, this means that people are needed to save for a long
time.
o This means that people would have to rent a house to live during the period of
saving, therefore boosting the rental market

c) Explain the likely impact on producer surplus of an increase in the demand for housing. Use a
diagram to illustrate your answer.

 Draw a diagram of consumer and producer surplus

 Label the area represented by the producer surplus
 If there is an increase in demand for housing, this would shift the demand curve outward to
match the increase in the producer surplus
 This means that at the new equilibrium, the price level is higher than before (p1 > p2)

e) With reference to Figures 1 and 2 and your own knowledge, discuss the functions of the price
mechanism in allocating housing. (15)

Two out of three paragraphs

 Rationing
o Impact
 Buy land, housing materials, planning costs, permission from the
government as the government will try and limit the amount of houses that
are being built each year
  Therefore, there will be an increase in price (Use demand and supply
diagram – as costs increases, price is likely to rise)
o However
 This is very significant as the rationing and the lack of space is a very
significant issue as shown by the data (A lot more houses will be built in the
US compared to the UK or Netherlands as the US has a lot more land that
are able to build houses on).
 Incentive
o Impact
 High prices can be an incentive for house builders to build more houses as it
is likely that they will make a profit. Increases supply,
o However
 High prices can also be an incentive for the consumers to
 Signalling
o Impact
o however
 House prices increase – more house builders are likely to be willing to build more houses –
there is an increase in supply – therefore the more houses available in the market –
therefore the house prices are likely to fall.
