This is the latest in our series of posts in our series on price theory problems with Professor Bryan Cutsinger. You can see all of Cutsinger’s problems and solutions by subscribing to his EconLog RSS feed. Share your proposed solutions in the comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!
Question: Housing is a highly durable good and often lasts for many decades. Consider the housing market in Cleveland.
Suppose that in 2026:
Cleveland has 250,000 existing homes, all built before the year 2000.
Homes never depreciate.
No new homes have been built in Cleveland over the past 26 years.
The marginal cost of building a new home in Cleveland is $200,000, and the construction industry has constant returns to scale.
(a) Using a standard supply and demand graph, draw Cleveland’s aggregate housing supply curve in 2026. Be sure to clearly label any key prices and quantities.
(b) Suppose demand for housing in Cleveland increases. Using your diagram, explain how this affects the equilibrium price and quantity of housing.
(c) Now suppose demand for housing in Cleveland decreases. Using your diagram, explain how this affects the equilibrium price and quantity of housing.
(d) Do increases and decreases in housing demand have symmetric effects on housing prices and quantities in Cleveland? Explain your answer using your supply curve.
Source:
www.econlib.org