People often argue that there is a “shortage” of childcare. Using the model of demand and supply, evaluate whether this argument is likely to be correct.
In economic theory of demand and supply, a "shortage" of childcare reflects a deficit in producer supply of a good or service, in this case, childcare. A shortage in the supply of a good/service can happen anywhere along the supply curve, at any demand level and at any price level.
The relationship between supply and demand has two perspectives and both a direct and an inverse relationship to price.
- From the producers' perspective, price increases as supply increases (supply has a direct relationship to price).
- From the consumers' perspective, quantity consumed increases as price decreases (consumption has an inverse relationship to price).
A shortage in supply of a good or service, of childcare, occurs when the producer provides a quantity of childcare that is less than the amount needed/demanded by consumers in the marketplace.
- When there is a shortage, if, on the supply curve, the price is low, then the shortage is due to few consumers who need or who know about childcare offered.
- When there is a shortage, if, on the supply curve, the price is high, then the shortage is due to more consumers needing/demanding childcare than the producers' technology, expertise or materials (e.g., licensing) can provide.
In the present economy, with many families needing/demanding childcare and with general prices for all goods and services, including childcare, being high, if people correctly argue that there is a shortage of childcare, this would mean that, on the producer supply curve, the high volume of childcare provided--which reflects the direct supply curve correlation of price to supply--is insufficient to supply childcare to all families needing/demanding childcare.
Childcare market equilibrium will be met when the high and rising price goes beyond consumers' opportunity cost and they quit demanding childcare because they have found a substitute or have exited the childcare market.
The concept of supply and demand is fundamental to economic theory. Demand is how much of a good or service is desired by the consumer base in a market economy (not an individual consumer). Supply is how much of a good or service is provided by the producer base in a market economy.
If consumer demand is high and producer supply is low, then prices will increase to the point of supply/demand equilibrium. If the consumer demand is low and producer supply great causing a glut on the market (over-supply), then prices will decrease to the point of supply/demand equilibrium.
Based on this basic relationship between price and supply/demand equilibrium, if prices for childcare are increasing, then we can say there is a rising need/demand for childcare. If consumers are willing to pay increasing prices, this indicates a deficit in supply, a shortage in supply, of childcare.
Recently the Pew Charitable Trust put out a study highlighting the increasing price of childcare. This indicates a consumer demand that is outpacing the producer supply, thus this indicates a shortage of childcare because demand/supply equilibrium is pushing supply and price further out. As demand/supply equilibrium is reached at the highest price consumers will pay for childcare, then demand will be curtailed when more and more mothers stay at home, as the Pew study illustrates.