Ive heard repeatedly when trying to learn about our housing situation that we don’t have enough homes. I don’t understand how that’s the case or if it’s even true. Who or what is stopping more homes from being built exactly? If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
In: Economics
>If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
That’s a misunderstanding of supply and demand.
Economically speaking, demand is not a single fixed number. Neither is supply. They are *curves*.
You seem to be imagining that there’s a demand for, say, 1000 houses and a supply of 800 houses, and you’re expecting the suppliers to increase their production to increase that supply number.
But what actually happens is that there’s a demand curve matching a number of houses to a price, and a supply curve matching a number of houses to a price, and they go in opposite directions.
So, for example: let’s imagine there are 1000 people that might possibly want a house.
You might have a demand curve that looks like: 600 houses if a house costs $100, 700 houses if a house costs $90, 800 at $80, 900 at $70, 1000 at $60.
And you might have a supply curve that looks like: 1000 houses if a house costs $100, 900 at $90, 800 at $80, 700 at $70, 600 at $60.
The equilibrium of supply and demand says that, over time, the point where those curves meet is where the stable price and quantity will be. Here, the curves intersect at 800 houses at $80.
But that leaves 200 people without a house. And this is economically *stable* – with no other changes to the system, the suppliers will *never* build more houses.
The issue is the difference between the common-parlance term “demand” and the economic term “demand” – and the same thing for “supply”. Basically, the issue is that it’s not *profitable* to build those last 200 houses.
In order to change this, what needs to happen is not just moving along the existing demand or supply curves – that’s not economically stable. What needs to happen is shifting the *entire curve*, which changes the equilibrium intersection point. This happens for a lot of different reasons, but the “easiest” one (from an external perspective) is often government intervention. Governments can raise or lower the demand curve by giving or taking money on the purchase side of things – e.g. subsidies or taxes on home buyers. Governments can raise or lower the supply curve by incentivizing or restricting construction – e.g. construction subsidies or construction regulations and taxes.
Regulation has been noted here as a limiting factor in a few comments, which is only somewhat true. There *are* a bunch of regulations and laws that act to lower the supply curve (though they *can* have other important benefits – e.g. it’s cheaper to build things without a fire code, but having a fire code saves lives). However, even if there were no housing regulations whatsoever, there would still be a mismatch between “how many people theoretically want a house” and “what is the actual economic equilibrium point”. And there are also regulations that act to *raise* the supply curve – e.g. incentives for building low-income housing. The “net effect” of the regulations is complicated to calculate and varies by jurisdiction. Certainly there are locations in the US where the net effect is a “negative” (the changed supply and demand curves result in a lower-total-houses point), but it’s unlikely that this is always true, and it’s plausible that there are locations and contexts where the net effect is “positive” (particularly where there is significant investment in low-income housing & housing subsidies).
Even this is a simplified view, of course, because all housing isn’t identical, so there are actually multiple markets that affect each other (apartment vs standalone house, large living area vs small living area, etc), but this is the “core” of the problem.
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