Real estate is an economic product that is subject to economic laws and influences, much like all of the other goods and services in our economic system.Supply and demandThe goal of an economic system is to produce and distribute a supply of goods and services to satisfy the demand of its constituents. Economic activity therefore centers on the production, distribution and sale of goods and services to meet consumer demand.Supplyis the quantity of a product or service available for sale, lease, or trade at any given time.Demandis the quantity of a product or service that is desired for purchase, lease, or trade at any given time.The interplay of supply and demand is what makes an economy work: consumers demand goods and services; suppliers and sellers produce and distribute the goods and services for a negotiated price.In addition to supply and demand, the other critical component of an economic system is the price mechanism, or simply, price. A priceis the amount of money or other asset that a buyer has agreed to pay and a seller has agreed to accept to complete the exchange of a good or service. It is a quantification of the value of an item traded.Price in this context means the final trading price; it is not the preliminary asking price of the seller nor the initial bidding price of the purchaser. Asking and bidding prices are pricing positions in a negotiation between the parties prior to the exchange. The true price of an item or service is the final number the parties agree to.Value and value determinants.Price is not something of value in itself. It is only a number that quantifies value. The economic issue underlying the interplay of supply and demand is, how do trading parties arrive at the value of a good or service as indicated by the price?Consider consumer demand for air conditioners. Why do air conditioners have value? How do they command the price they do?The value of something is based on the answers to four questions:How much do I desire it?How useful is it?How scarce is it?Am I able to pay for it?Desire.One determinant of value is how dear the item is to the purchaser. Returning to the air conditioner example, the question becomes "how much do I desire to be cool, dry, and comfortable?" To a person who lives in the tropics, it is safe to say that air conditioning is more valuablethan a heating system. It is also safe to say the
opposite is true for residents of northern Alaska.Utility.The second determinant of value is the product's ability to do the job. Can the air conditioner satisfy my need to stay cool? How cool does it make my house? Does it even work properly? Of course, I won't pay as much if it is old or ineffectual.Scarcity.The third critical element of value is a product's availability in relation to demand. The air conditioner is quite valuable if there are only five units in the entire city and everyone is hot. On the other hand, the value of an air conditioner goes down if there are ten thousand units for sale in a 500-person market.