ECON 1002 Week 3 Supply Shift Graph Explanation Example

When a Riverside City Limits Short-Term Rentals to Hosts' Own Homes: Explaining a Leftward Supply Shift and the Movement Along Demand That Visitors Feel as a Higher Nightly Rate

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Walden University

ECON 1002: Microeconomics

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Month Day, Year

When a Riverside City Limits Short-Term Rentals to Hosts' Own Homes: Explaining a Leftward Supply Shift and the Movement Along Demand That Visitors Feel as a Higher Nightly Rate

The Market and the Rule

The market in this explanation is nightly short-term stays in apartments and houses in Port Ellery, a composite riverside city of about 180,000 people with a busy summer visitor season. Hotels are outside the market as defined, although they matter at the end. In March, the city council adopted a rule that only a host's primary residence may be listed for short-term stays; investor-owned units that nobody lives in may no longer be rented by the night. About a third of the listed units were of that kind.

The Figure

Table 1 gives the illustrative weekly schedule behind the graph, and Figure 1 shows the part that changed: nights offered at each rate before and after the rule.

Plotted on a standard diagram, with the nightly rate on the vertical axis and nights booked on the horizontal, the original equilibrium sits at $140 and 2,000 nights a week. After the rule, supply and demand meet at about $168 and 1,580 nights.

Table 1

Illustrative Weekly Schedule for Short-Term Stays in Port Ellery

Figures are illustrative and constructed for this explanation. Demand is the same in both periods.

At every rate, fewer nights are offered after the rule. On a standard diagram this is the whole supply curve moving left; the demand curve does not move.

Figure 1

Nights Offered per Week at Each Nightly Rate, Before and After the Primary-Residence Rule

Why the Rule Moves Supply

The rule is a change on the sellers' side. It does not change how much visitors want to stay or what they are willing to pay; it removes units from the market, so at any given rate fewer nights can be offered. That is the definition of a decrease in supply: a leftward shift of the whole curve, caused by something other than the price of the good itself (Greenlaw et al., 2022). The price did not cause the change, and the change happened at every price, which is why it is drawn as a new curve rather than a point sliding along the old one. Hosts who remain may raise their rates, but that response is part of reaching the new equilibrium, not a second shift. The size of the shift is set by how many units the rule removes. If a third of listings were investor units, and those units were offered on most nights of the week, supply at each rate falls by roughly that share, which is what the table shows: 2,000 nights offered at $140 before the rule and 1,300 after. A rule that removed only a tenth of listings would move the curve much less, and the rate would rise by much less.

What Visitors Experience

Visitors see a higher nightly rate and book fewer nights, and it is easy to describe this as visitors wanting the city less. That would be wrong. The demand curve has not moved. Visitors book fewer nights because the price rose, which is a movement up and to the left along the same demand curve. In the table, at $140 visitors still want 2,000 nights, exactly as before; they book fewer only because $140 stays are no longer available and the going rate has climbed. A change in quantity demanded caused by a change in price is a movement along the curve, while a change in demand is a shift of it, and only the first happened to visitors here (Mankiw, 2021).

What the Figure Leaves Out

The figure treats the city's short-term stays as a closed market, which they are not. Hotels are a close substitute, and some visitors priced out of apartments will book hotel rooms, which would raise hotel occupancy and perhaps hotel rates. Some investor-owned units may move onto the long-term rental market, adding to housing supply for residents; research on home-sharing in U.S. cities found that more listings were associated with higher rents and house prices, which suggests the rule could push in the other direction for residents (Barron et al., 2021). The figure also shows one week and does not capture how hosts and visitors adjust over a full season. Finally, enforcement matters: if some investor units stay listed illegally, the supply shift is smaller than drawn.

References

Barron, K., Kung, E., & Proserpio, D. (2021). The effect of home-sharing on house prices and rents: Evidence from Airbnb. Marketing Science, 40(1), 23-47. https://doi.org/10.1287/mksc.2020.1227

Greenlaw, S. A., Shapiro, D., & MacDonald, D. (2022). Principles of microeconomics (3rd ed.). OpenStax. https://openstax.org/details/books/principles-microeconomics-3e

Mankiw, N. G. (2021). Principles of microeconomics (9th ed.). Cengage Learning.