Cutsinger’s Solution: Housing Quantity and Price
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 […] The post Cutsinger’s Solution: Housing Quantity and Price appeared first on Econlib .
In the city of Cleveland, the housing market has been stagnant for decades. With 250,000 existing homes built before 2000 and no new constructions over the past 26 years, the local housing supply presents a unique challenge. These homes, which never depreciate, form the backbone of the market. Meanwhile, the marginal cost of building a new home is a constant $200,000, and the construction industry operates under constant returns to scale. This setup creates a distinct housing supply curve that dictates how the market responds to changes in demand.
To visualize Cleveland's aggregate housing supply curve in 2026, we start by noting that the existing stock of homes is fixed. At prices below $200,000, no new homes will be built because builders would incur losses. Consequently, the total quantity supplied remains at 250,000 units. On a standard supply and demand graph, this would appear as a vertical supply curve at 250,000 homes for all prices below $200,000.
Now, let's examine how changes in demand affect the equilibrium price and quantity. If demand for housing in Cleveland increases, the demand curve shifts to the right. Since the supply curve is vertical, the equilibrium price will rise to the new demand level, while the quantity supplied remains unchanged at 250,000 units. This results in a higher equilibrium price but no change in the quantity of housing available.
Conversely, if demand decreases, the demand curve shifts to the left. The equilibrium price will drop to the new demand level, but the quantity supplied will still be fixed at 250,000 units. This means that the equilibrium price decreases, but the quantity of housing remains constant.
The effects of increases and decreases in housing demand are not symmetric in Cleveland. When demand increases, the price rises, but the quantity supplied does not change. When demand decreases, the price falls, but again, the quantity supplied remains the same. This asymmetry arises because the supply curve is vertical, reflecting the fixed existing stock of homes and the constant marginal cost of construction.
In summary, Cleveland's housing market is characterized by a fixed supply of existing homes and a constant marginal cost of construction. This results in a vertical supply curve that leads to asymmetric effects on prices and quantities in response to changes in demand. As demand increases, prices rise without affecting the quantity supplied, while decreases in demand result in lower prices with no change to the quantity supplied. This unique market structure highlights the importance of durable goods and the implications for housing supply in cities with limited new construction.
