Chapter 15 - Applications and Illustrations of Economic Principles Flashcards
A new interchange is being planned for an interstate highway that curves around the western edge of the city. This has been widely publicized and several public hearings were held. The State Transportation Authority has not yet determined the location of this proposed interchange. At a press conference last week, the State Transportation Authority announced that they have narrowed down the options for the location of the proposed interchange to two intersections with major east-west highways.
Since then, the asking prices of four parcels of vacant land near those two intersections were raised by 50%, and one is already in contract. Which economic principle(s) does this illustrate? Remember, there may be more than one principle involved.
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- principle of anticipation
- supply and demand
- opportunity cost
- principle of change
- principle of competition
- highest and best use
The obvious answer that should have jumped out at you is the principle of anticipation. There is a new set of facts in the marketplace and buyers and sellers are reacting accordingly. Once the interchange becomes reality, any land in the immediate vicinity will be worth substantially more. What kind of properties would you normally find at exits off an interstate highway? There will be gas stations, convenience marts, fast food enterprises, and motels. All of these are expensive properties that require substantial investment. Sellers reacted by raising their asking prices. This is also related to the principle of supply and demand. There are only a few pieces of vacant land available in those two locations and the sellers are anticipating an increase in demand. The principle of anticipation has already triggered one sale by an investor willing to take a chance that this location will be the one chosen, even though he or she had to pay more for that chance. They must have been aware of the principle of opportunity cost and did not want to miss out on a good thing. The principle of change is also illustrated. Two weeks ago, this would not have happened. How about the principle of competition? This also may come into play as more investors or speculators sense the opportunity being offered by these four parcels of land. They may scout around and tried to entice other owners of land at those locations to sell their properties. Of course, the bottom line for these vacant land parcels may only be determined by extensive highest and best use studies.
Pete and Sally have lived in their house for 14 years now. They have three children, and the youngest just started first grade. Pete is working as a corporate accountant and recently got a promotion, and Sally started working 30 hours a week as a dental hygienist.
They feel pretty secure in their jobs now and have a little extra money saved. The house is starting to feel cramped for their family situation and needs some updating. Pete and Sally are trying to figure out the best course of action.
They love the neighborhood and hate the thought of moving. They’re considering putting on an addition with a family room and new master bedroom suite. They are considering remodeling the kitchen, as well; depending upon the bids they obtain for the cost of the addition.
If the remodeling proves to be too expensive, they may reconsider their options and investigate the cost of building a brand new house. There is an attractive, new subdivision which has just opened a model house about three miles west. However, this is in a different school district and the children would be very upset to switch schools and leave their friends behind.
What economic principle or principles come to bear in this scenario?
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- principle of anticipation
- principle of balance
- principle of conformity
- principle of regression
- principle of substitution
- principle of contribution
- principle of competition
Quite a few of the would come into play here. Let’s start with the principle of anticipation. Any future actions or investments involve this principle. Pete and Sally have to balance the anticipated costs of either improving their present property or buying a new one, against the anticipated future benefits.
The principle of balance must be considered, as well. They don’t want to overimprove their property and put too much into an older house. The principle of conformity states that value is created and sustained when a property conforms to the demands of the market.
This could result in them losing money, according to the principle of regression, if they overimprove their property for the neighborhood. This could be checked by applying the principle of substitution and surveying the values of other properties in their neighborhood or market area.
The principle of contribution will have special application when determining the effect of the addition and the possible kitchen remodeling. This looks at how particular components of a property contribute to the overall value of the property.
The value of the new house in the new subdivision must be judged in the context of the principles of anticipation and competition.
You are asked to appraise a vacant retail building. It is a 25 year old one-story concrete block structure with a flat roof and contains 8,000 square feet. It has been vacant for over a year and was last used as a garden center. It has four acres of land with 600 feet of frontage on a state highway.
It is located on the north side of the city in a neighborhood that is mostly comprised of 30- to 35-year-old ranches and split levels. Most of the new residential development is on the east side of town.
There are some other commercial properties along the state highway including a diner, several auto repair shops, a day care center, a used car dealership, and a mini golf facility.
What economic principles should you take into account when appraising this property?
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- Anticipation
- Highest and Best Use
This will be a classic highest and best use study. We would need to investigate all of the possibilities for this property.
Probably the first step would be to investigate what uses would be legally permissible on the site. Check the zoning and any possibilities of getting a zoning change or variance. Check to make sure there are no deed restrictions or restrictive easements.
The physical possibilities seem good for a number of uses. The property has a good-sized piece of land with substantial frontage. It should offer ample parking, if the topography is suitable. The building is of ample size and could offer space for a number of activities.
In investigating the financial feasibility of the property, we also need to consider the possibility of subdividing. We need to analyze the market utilizing the principles of competition and substitution. Perhaps there is not much demand for 8,000 square feet, but if it could be subdivided into two, three or four smaller spaces lots there would be a strong demand.
In determining the financial feasibility of leasing the space, we would have to investigate rental rates and rental vacancies. Here, the principle of anticipation again will be important.
If our investigation shows that there are several possible uses that meet the criteria of being legally permitted, physically possible, and financially feasible, then we have to compare them and determine which of the possible uses would be maximally productive and lead to the highest return.
You are being asked to appraise a three-acre parcel of vacant land. The owner says that the minimum lot size in that area, allowed by zoning, is one acre.
What principle or principles do we need to consider when undertaking this appraisal assignment?
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- Anticipation
- Competition
- Conformity
- Externalities
- Highest and Best Use
- Substitution
- Supply and Demand
This primarily is an exercise in determining the highest and best use of the vacant parcel.
Your first step should probably be investigating the zoning ordinance and determining if one acre minimums are indeed the case. If so, you need to consider the possibility of leaving the lot as is or subdividing it into two or three parcels.
If subdividing, are there setback requirements for each lot? Are there any other restrictions on construction, such as driveway requirements or building height limitations?
Then you need to inspect the physical characteristics of the land. What is the topography? Are there any apparent soil problems? What is the shape of the property? How much frontage is there? Would it be physically possible to subdivide the property into two or three parcels and provide adequate access for each?
Then you need to investigate the financial feasibility of the three different scenarios. Is there a viable market for three-acre lots? What is the supply and demand situation for one-acre lots, one-and-a-half to two-acre lots, and three- acre lots? If the property were to be subdivided, what type and price range of houses would be most appropriate? The principle of externalities should be explored to see if there are any unusual positive or negative influences in the market area.
What would the development costs be for subdivision? How much would have to be spent for land preparation, driveways, and utilities?
All of these kinds of questions would have to be answered by researching the market and employing the principles of supply and demand, substitution, competition, conformity, and anticipation.
I am considering making an offer on your property, which is listed for $220,000. My real estate agent provides me with information detailing three recent sales of similar properties in your neighborhood that range between $190,000 and $210,000.
What is the primary economic principle that I will employ when making a decision as to how much to offer?
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- Principle of Substitution
A landowner has been dumping tires on his property over the last six months. Homeowners across the street have contacted the landowner and the local zoning and code enforcement authorities, but their complaints have gone unheeded.
The adjoining property owners have banded together and hired an attorney to try to get the tires cleaned up. They are citing problems such as the tires being a breeding ground for mosquitoes and that they constitute a fire hazard.
What economic principle or principles could account for a loss of value for the adjoining property owners in a situation such as this?
- Anticipation
- Balance
- Change
- Competition
- Conformity
- Contribution
- Externalities
- Four Agents of Production
- Highest and Best Use
- Increasing and Decreasing Returns
- Opportunity Cost
- Substitution
- Supply and Demand
- Surplus Productivity
- Externalities
This is a clear illustration of the principle of externalities. It postulates that a loss in value may be incurred from influences that are outside the boundaries of your own property.
