Excess Demand

Appendix B

As a starting point in understanding excess demand, we begin with the traditional supply and demand model, illustrated in Fig. B.1.[1] In this figure, the price at which child care is demanded or supplied is represented on the vertical axis; the amount of child care (e.g., number of hours of care per week) is given on the horizontal axis. The market demand for child care (curve DD´) depicts the maximum number of hours of child care demanded at each price. This curve is downward sloping indicating that as the price of child care increases, the amount of care demanded declines, because some parents will no longer find it worth their while to work. As a result, they will drop out of the labor market and no longer demand any child care.

The market supply for child care (curve SS´ in Fig. B.1) represents the minimum price at which child care producers (i.e., providers) will supply a given amount of child care. This curve is upward sloping because higher prices are needed to attract additional providers into the market. As the price of child care goes up, providing child care will become more and more profitable and hence draw more and more people into becoming child care providers, either by becoming family day care providers or by opening up new day care centers.

Fig. B.1.--The Supply and Demand for Child Care

Assuming a competitive market,[2] the price of child care services (at a specified level of quality) will be determined by the intersection of the market demand and supply curves. In Fig. B.1, this occurs where the price is equal to P*. At this price, the amount of child care parents are willing to buy exactly equals the amount providers are willing to supply, and the market clears. In other words, there will be neither excess supply nor excess demand.

If the price that parents are willing to pay for child care increases, perhaps because they are earning more, the demand curve will shift upward, and the new equilibrium in the child care market will result in a higher price. The higher price in turn will result in a greater amount of child care services being supplied.

If the price of child care is above the market clearing price, there will be many providers willing to supply child care at that price but few parents willing to purchase it. This phenomenon is called the affordability problem (or excess supply). If the price is set below the market clearing price, there will be plenty of parents demanding care but few providers willing to supply care at that price. This is called the availability problem, or excess demand. In a competitive market in which prices are allowed to fluctuate, a condition of excess demand will not remain for very long because parents seeking care will bid up the price until the price reaches the market clearing price and the excess demand has been eliminated. With subsidies of some child care slots, however, the price of these slots can remain below the market clearing price and thus create a permanent excess demand that clears in nonpecuniary ways (e.g., through waiting lists). The following two paragraphs discuss this situation.

A subsidy to child care can be represented in Fig. B.1 as a downward shift in the supply curve (SS´) because providers would be willing to offer child care at a lower price (the subsidy would make up for the difference). The demand for care, however, will increase because the price consumers have to pay declines. If only a limited number of providers are eligible for subsidies, however, these providers will become relatively more attractive than providers who are not subsidized (and hence are more expensive). The result would be that more parents would demand child care from the subsidized providers than they would be able to provide. The result would be excess demand for the subsidized child care slots. This excess demand must be rationed in some way. In the child care sector this typically happens through the creation of long waiting lists. These waiting lists, however, do not indicate that there is an overall shortage of child care. It merely indicates that the demand for subsidized child care exceeds the supply of subsidized child care slots at the subsidized price.

Although there is excess demand for subsidized child care spaces, it cannot be assumed that the children on these waiting lists are without child care. It would be in the interest of parents with children in other types of care to sign up (i.e., be placed on the waiting list) for subsidized care in case it became available. The length of the waiting list is also not a reliable indicator of the amount of excess demand when children can be signed up for more than one subsidized child care slot. Furthermore, some parents may not place their child(ren) on the waiting list if they perceive the chance of getting subsidized care to be so low that there is effectively little hope that they could obtain a job that would make it worth their while to work.

[1]This section relies heavily on Leibowitz and Waite (1988).

[2]This assumption is not unreasonable given the large number of child care providers and the easy entry and exit into and out of the industry.

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