This is the latest in a series of posts by Professor Brian Cutsinger on issues in price theory. Subscribe to Cutsinger’s EconLog RSS feed to see all Cutsinger issues and solutions. Please share your proposed solutions in the comments. Professor Cutsinger will be participating in the comments over the next few weeks and will post his proposed solution shortly thereafter. May the graph be favorable to you and may the price theory endure!
Question: Housing is a very durable product, often lasting for decades. Consider Cleveland’s housing market.
Assume that in 2026:
Cleveland has 250,000 existing homes, all built before 2000. Housing does not depreciate. No new housing has been built in Cleveland in the past 26 years. The marginal cost of building a new home in Cleveland is $200,000, and the construction industry has consistently achieved returns to scale.
(a) Using a standard supply and demand graph, draw the multifamily housing supply curve for Cleveland in 2026. Be sure to clearly label key prices and quantities.
(b) Assume that the demand for housing in Cleveland increases. Using a diagram, explain how this affects the equilibrium price and quantity of housing.
(c) Now suppose that the demand for housing in Cleveland has decreased. Using a diagram, explain how this affects the equilibrium price and quantity of housing.
(d) Do increases and decreases in the demand for housing have symmetrical effects on the price and quantity of housing in Cleveland?Explain your answer using a supply curve.
