EconLog Price Theory: Housing Quantity and Price
New Article:
- Welcome to the latest installment of our series on price theory challenges with Professor Bryan Cutsinger. For more of Cutsinger’s problems and solutions, don’t forget to subscribe to his EconLog RSS feed. Share your solutions in the comments section below. Professor Cutsinger will be engaging with comments for the next few weeks, and his proposed solution will follow shortly. Let the graphs guide you, and may price theory prosper!
Question: Housing, a durable good, plays a significant role in the market and can last for decades. Let’s delve into the housing market scenario in Cleveland.
Imagine the following scenario in 2026:
- Cleveland boasts 250,000 existing homes, all constructed before the year 2000.
- Homes in Cleveland do not depreciate in value.
- No new residential properties have been developed in Cleveland over the past 26 years.
- The cost of constructing a new home in Cleveland stands at $200,000, with the construction sector operating at constant returns to scale.
(a) Utilizing a conventional supply and demand graph, outline Cleveland’s aggregate housing supply curve in 2026. Ensure to label essential prices and quantities clearly.
(b) Should there be an increase in the demand for housing in Cleveland, elaborate on how this impacts the equilibrium price and quantity of housing using your graph.
(c) Conversely, if the demand for housing in Cleveland decreases, utilize your diagram to explain the subsequent changes in the equilibrium price and quantity of housing.
(d) Do fluctuations in housing demand have symmetrical effects on housing prices and quantities in Cleveland? Justify your response by referring to the supply curve.
