BUSI 620 Week 1 DB Forum 1 Example

Discussion Board Forum 1: Market Forces, Demand and Supply

BUSI 620 Global Economic Environment, Discussion Board Forum 1 (thread and 1 reply)

Thread by [Student Name]

The forum questions and the classmate's thread are composites standing in for the course's own; the research cited is real, and the requirements follow Liberty's public course guide for BUSI 620.

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Rent control is a clear case of the market forces in Baye and Prince (2017). Picture the market for apartments in a city: demand slopes down because fewer households rent at higher rents, and supply slopes up because owners offer more units, and keep more buildings as rentals, when rents rise. The two curves cross at an equilibrium rent where the number of apartments people want equals the number offered.

A rent ceiling below that equilibrium does not shift either curve; it moves the market along them. At the lower legal rent, more households want apartments and owners want to offer fewer, so the result is a shortage. The textbook also notes the less visible effects of a ceiling: when price cannot ration a good, something else does, such as waiting lists, connections or reduced maintenance, and suppliers look for uncontrolled uses for their resources.

The San Francisco evidence fits this prediction closely. Diamond et al. (2019) studied a 1994 law that extended rent control to small multifamily buildings built before 1980. Landlords whose buildings became covered reduced rental housing supply by 15 percent, mainly by selling to owner-occupants and redeveloping their buildings into condominiums. The ceiling did not just ration the existing apartments; it gave owners a reason to stop supplying them. The authors concluded that this loss of rental supply likely pushed up market rents across the city in the long run, the opposite of what the law intended.

For a manager, the lesson is broader than housing. Any price set below equilibrium, whether by regulation or by a company that refuses to raise prices during a shortage, sends signals that change behavior on both sides of the market. A firm that holds prices down when demand surges should expect shortages and should plan how it will ration, since the market no longer does it. The same logic explains why airlines and hotels raise prices at peak times: a price held below equilibrium simply moves the rationing to a waiting line or a sold-out sign.

Reply to Andre

Andre, you argued that rent control protects tenants from being priced out of neighborhoods where they have lived for years. The San Francisco study supports that part of your argument: Diamond et al. (2019) found that rent control reduced renters' mobility by 20 percent and lowered displacement from the city, so incumbent tenants did benefit.

The question is who pays. The same study found that covered landlords removed units from the rental market, which raised rents for everyone who was not already protected, including younger renters and newcomers. In effect, the policy transferred money from future tenants to current ones, and it did so without anyone voting on that transfer. There is also a fairness problem within the protected group: a high-income tenant who happened to sign a lease in a covered building receives the same benefit as a low-income family, because the benefit is attached to the unit rather than to need. The landlords who converted their buildings were responding exactly as the supply curve predicts, so blaming them misses the point; the incentive came from the ceiling. Would a subsidy funded by the whole city, such as housing vouchers, protect long-time tenants without shrinking the supply that future renters depend on?

References

Baye, M. R., & Prince, J. T. (2017). Managerial economics and business strategy (9th ed.). McGraw-Hill Education.

Diamond, R., McQuade, T., & Qian, F. (2019). The effects of rent control expansion on tenants, landlords, and inequality: Evidence from San Francisco. American Economic Review, 109(9), 3365-3394. https://doi.org/10.1257/aer.20181289