0:00:03.497,0:00:07.430
- [Alex] Why is this house selling[br]for more than $2.5 million?

0:00:08.240,0:00:09.640
Or this apartment,

0:00:09.640,0:00:12.945
renting for almost $3,000 a month?

0:00:13.444,0:00:15.541
Is it greed? Conspiracy?

0:00:16.124,0:00:17.134
No.

0:00:17.374,0:00:21.600
Just a powerful economic concept,[br]the elasticity of supply.

0:00:22.540,0:00:25.500
Sounds complex, [br]but it's actually quite simple.

0:00:26.200,0:00:28.680
In the United States[br]and around the world,

0:00:29.165,0:00:30.624
many industries and jobs

0:00:30.624,0:00:33.840
have been concentrating[br]in a few dynamic cities,

0:00:34.300,0:00:37.540
like tech in Silicon Valley, [br]entertainment in LA,

0:00:38.220,0:00:40.330
and pharmaceuticals in Boston.

0:00:40.920,0:00:42.215
So more and more people --

0:00:42.215,0:00:44.480
they want to live[br]in these dynamic cities,

0:00:44.760,0:00:47.220
and that increases[br]the demand for housing.

0:00:47.720,0:00:50.816
And remember, what happens[br]with an increase in demand?

0:00:50.816,0:00:53.060
The demand curve[br]shifts to the right,

0:00:53.400,0:00:57.880
and buyers are willing to buy more[br]at any given price.

0:00:58.980,0:01:01.590
This leads to a new equilibrium,

0:01:01.590,0:01:04.200
with a higher quantity[br]sold at a higher price.

0:01:05.140,0:01:07.400
But which increase will be larger?

0:01:07.400,0:01:10.760
The quantity change,[br]or the price change?

0:01:11.720,0:01:13.364
That depends upon

0:01:13.364,0:01:17.200
whether the supply[br]is elastic or inelastic.

0:01:17.740,0:01:19.717
If the supply is elastic,

0:01:19.717,0:01:23.201
meaning that producers[br]can easily produce more housing,

0:01:23.201,0:01:26.180
then the quantity supplied[br]will increase a lot,

0:01:26.640,0:01:29.524
and the price[br]will only increase a little.

0:01:30.220,0:01:33.753
But if the supply is inelastic --

0:01:34.340,0:01:37.940
that means it's not easy[br]to produce more housing,

0:01:38.360,0:01:41.120
and our supply curve[br]looks more like this.

0:01:41.940,0:01:43.090
In this case,

0:01:43.090,0:01:46.479
the quantity supplied[br]only increases a little,

0:01:46.823,0:01:49.539
but the price goes up a lot.

0:01:51.140,0:01:53.514
That happens when housing suppliers

0:01:53.514,0:01:56.340
can't easily expand[br]their production

0:01:56.800,0:01:58.600
in response to the higher price.

0:01:59.783,0:02:05.480
Now, unfortunately, many cities[br]have inelastic housing supplies.

0:02:06.060,0:02:10.100
So as people flock to these cities,[br]we see higher and higher prices,

0:02:10.680,0:02:13.400
with little increase[br]in the quantity of housing.

0:02:14.180,0:02:15.381
Why?

0:02:15.381,0:02:17.910
Well, first, there are[br]natural problems.

0:02:18.460,0:02:20.520
Many of the in-demand cities --

0:02:20.520,0:02:22.580
they're surrounded[br]by beautiful water.

0:02:23.400,0:02:26.340
Nice, but that means[br]a limited supply of land.

0:02:26.680,0:02:30.900
But we compound natural problems[br]with unnatural ones.

0:02:31.440,0:02:32.680
In many cities,

0:02:32.680,0:02:35.526
zoning laws and other regulations

0:02:35.526,0:02:38.740
prevent builders[br]from creating more housing.

0:02:39.520,0:02:41.405
Take San Francisco, for example --

0:02:41.655,0:02:44.940
it's surrounded by water, [br]so there's limited land.

0:02:45.530,0:02:48.980
But if you can't build out, [br]how about building up?

0:02:49.440,0:02:51.855
There's plenty of land in the sky.

0:02:52.860,0:02:55.474
San Francisco's [br]zoning laws, however,

0:02:55.474,0:02:58.300
have made it impossible[br]or very expensive

0:02:58.640,0:03:01.915
to build taller buildings[br]in many parts of the city.

0:03:02.860,0:03:07.325
Even changing single-family homes[br]to duplexes or fourplexes

0:03:07.325,0:03:09.726
has typically been prohibited.

0:03:10.760,0:03:11.980
And that's not all.

0:03:12.720,0:03:15.600
Suppose a builder does find[br]a plot of land to use.

0:03:16.020,0:03:18.180
Well, next, they need[br]a building permit.

0:03:18.580,0:03:21.355
And the process for filing[br]for building permits --

0:03:21.355,0:03:23.480
they can be hard to understand.

0:03:23.480,0:03:26.700
City officials can leave applicants[br]hanging for years.

0:03:27.260,0:03:28.562
In San Francisco,

0:03:29.140,0:03:34.730
it takes an average of 627 days

0:03:34.730,0:03:37.640
to receive a building permit[br]for a new house.

0:03:38.220,0:03:41.400
That delay adds a lot[br]to the costs for builders.

0:03:41.920,0:03:45.220
And if a builder does get[br]a building permit, it's not over.

0:03:45.950,0:03:49.119
Many people can still veto[br]the project:

0:03:49.780,0:03:51.160
environmental agencies,

0:03:51.900,0:03:53.365
planning commissions,

0:03:53.983,0:03:56.160
historic preservation societies,

0:03:56.740,0:03:58.948
and groups of existing residents.

0:03:59.380,0:04:02.993
They can slow things down[br]with lawsuits, protests,

0:04:03.571,0:04:05.213
and bureaucratic objections.

0:04:06.340,0:04:08.300
So now that we better understand

0:04:08.300,0:04:10.966
why the supply of housing[br]is inelastic,

0:04:11.600,0:04:14.393
let's revisit our supply[br]and demand graph

0:04:14.393,0:04:17.199
and illustrate what happens[br]in the housing market

0:04:17.199,0:04:18.858
with an increase in demand.

0:04:19.399,0:04:21.343
Suppose a city is thriving,

0:04:21.343,0:04:24.367
and the demand to live[br]in that city increases.

0:04:24.800,0:04:27.040
The demand curve[br]shifts to the right.

0:04:27.700,0:04:29.214
To keep it simple,

0:04:29.214,0:04:32.165
say that ten people[br]want to move into the city.

0:04:33.100,0:04:35.599
Builders see[br]the increase in demand,

0:04:36.000,0:04:37.740
and they try to build more,

0:04:38.260,0:04:39.747
but they're stopped

0:04:39.747,0:04:41.618
by water, height restrictions,

0:04:41.618,0:04:44.340
zoning laws, bureaucracy, lawsuits.

0:04:44.700,0:04:47.139
That's our inelastic[br]supply of housing.

0:04:48.320,0:04:53.080
So imagine, somehow a builder[br]finds a way to construct one home,

0:04:53.540,0:04:55.943
increasing the quantity[br]supplied a little.

0:04:56.337,0:04:58.400
But ten people want to move in!

0:04:59.180,0:05:01.360
So who gets the new home?

0:05:02.260,0:05:04.060
Well, the potential[br]new residents --

0:05:04.060,0:05:09.160
they compete to get the new home[br]by bidding up the price.

0:05:09.720,0:05:11.740
The price for the new home goes up.

0:05:12.040,0:05:14.057
First, one person drops out,

0:05:14.057,0:05:15.952
and then the price[br]goes up some more,

0:05:15.952,0:05:17.633
and another person drops out.

0:05:18.085,0:05:21.974
The price keeps going higher[br]and higher and higher

0:05:21.974,0:05:25.020
until just one person is left,

0:05:25.320,0:05:27.740
and the high bidder[br]wins the new home.

0:05:28.520,0:05:30.443
Notice that it's not[br]the owners of housing

0:05:30.443,0:05:31.700
jacking up the price --

0:05:32.220,0:05:37.977
it's the buyers who must bid higher[br]to out-compete one another,

0:05:38.600,0:05:40.267
given the limited supply.

0:05:41.200,0:05:43.140
An inelastic supply of housing --

0:05:43.140,0:05:46.702
it does mean higher property values[br]for existing residents.

0:05:47.360,0:05:49.700
So existing property owners --

0:05:49.700,0:05:52.176
they have an incentive[br]to block new construction.

0:05:52.920,0:05:55.820
And that's one reason[br]why reform is difficult.

0:05:56.380,0:05:57.555
And who's harmed?

0:05:57.800,0:05:58.980
Well, lots of people,

0:05:59.320,0:06:02.014
but most especially[br]the potential residents

0:06:02.014,0:06:04.040
who are bid out of the market.

0:06:04.460,0:06:09.081
They'll have to live further away,[br]with longer commutes,

0:06:09.462,0:06:13.200
or they may not even be able[br]to live near good jobs at all.

0:06:14.240,0:06:17.278
And notice that the people[br]who are harmed --

0:06:17.636,0:06:18.987
they don't get a vote.

0:06:19.720,0:06:21.014
By definition,

0:06:21.680,0:06:23.254
the potential residents --

0:06:23.254,0:06:28.460
they don't live in the city[br]that priced them out of a home.

0:06:30.010,0:06:31.771
It's not all bad news, however.

0:06:32.137,0:06:35.780
Slowly, some cities[br]are starting to change.

0:06:36.500,0:06:38.860
In 2016, Auckland, New Zealand --

0:06:39.240,0:06:40.697
they liberalized their laws

0:06:40.697,0:06:43.440
to allow upzoning[br]in much of the city.

0:06:44.220,0:06:47.369
And the number[br]of new houses skyrocketed,

0:06:47.369,0:06:49.635
and housing prices moderated.

0:06:50.280,0:06:52.700
The rest of New Zealand[br]is now following suit.

0:06:53.807,0:06:57.197
Even San Francisco[br]is starting to allow

0:06:57.197,0:06:59.430
new duplexes and fourplexes.

0:07:00.060,0:07:02.700
So let's hear it for a more[br]elastic supply of housing.

0:07:02.700,0:07:03.700
[cheering]

0:07:03.700,0:07:05.740
Okay. There you have it.

0:07:06.060,0:07:09.940
If you want to understand[br]why housing prices are rising,

0:07:10.580,0:07:14.281
you must first understand[br]the elasticity of supply

0:07:14.624,0:07:16.779
and what makes housing supply

0:07:16.779,0:07:19.999
in many parts[br]of the world inelastic.

0:07:21.380,0:07:24.400
Now, you can test[br]your understanding of elasticity

0:07:24.400,0:07:26.530
by checking out[br]our practice questions.

0:07:26.980,0:07:29.521
We also have test banks[br]and lesson plans

0:07:29.521,0:07:30.777
for Economics teachers.

0:07:31.440,0:07:34.499
Or, if you're ready[br]for more microeconomics,

0:07:34.499,0:07:36.178
click for the next video.

0:07:36.672,0:07:38.581
♪ [music] ♪