ECONOMIC ANALYSIS

Economic Analysis

Economic Analysis

Introduction

Both demand and supply tend to be more elastic in the long run. This means that the quantity effects of price floors and ceilings tend to be larger over time. An extreme example of this is rent control, a maximum price imposed on apartments.

Rent control is usually imposed in the following way: As a prohibition or limitation on price increases. For example, New York City's rent control, imposed during World War II, prevented landlords from increasing rent, even when their own costs increased, such as when property taxes increased. This law was softened in 1969 to be gradually replaced by a rent-stabilization law that permitted modest rent increases for existing tenants.

Thus, the nature of rent control is that it begins with, at most, minor effects because it doesn't bind until the equilibrium rent increases.

Discussion

Moreover, the short-run supply of apartments tends to be extremely inelastic, because one doesn't tear down an apartment or convert it to a condominium (there were limitations on this) or abandon it without a pretty significant change in price. Demand also tends to be relatively inelastic because one has to live somewhere, and the alternatives to renting in the city are to live a long distance away or to buy (which is relatively expensive), neither of which are very good substitutes for many consumers. Long-run demand and short-run demand are not very different and are treated as being identical. Finally, the long-run supply is much more elastic than the short-run supply because, in the long run, a price increase permits the creation of apartments from warehouses (lofts), rooms rented in houses, and so on. Thus, the apartment market in New York City is characterized by inelastic short-run supply, much more elastic long-run supply, and inelastic demand.

Over time, however, the demand for apartments grows as the city population and incomes grow. Moreover, as the costs of operating an apartment rise due to property tax increases, wage increases, and cost of maintenance increases, the supply is reduced. This has little effect on the short-run supply but a significant effect on the long-run supply. The supply reduction and demand increases cause a shortage but results in few apartments being lost because the short-run supply is very inelastic. Over time, however, apartments are withdrawn from the market and the actual quantity falls, even as the demand rises, and the shortage gets worse and worse.( Blaug, 2007)

The ...