Demand, Supply and Equilibrium in Microeconomics

This report discusses the microeconomic concepts of demand, supply, and equilibrium and their implications on market prices. It analyzes two articles on the supply shortage in the legal cannabis market and the growing demand for rental housing in Canada.

Running head: MICROECONOMICS
Microeconomics
Name of the Student
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Table of Contents
Introduction................................................................................................................................2
Demand, supply and equilibrium...............................................................................................2
Summary of the article...............................................................................................................3
Economic analysis of the article................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................9

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Introduction
Microeconomics refers to the study of economics that deals with behavior of
individual firms and household and resource allocation. It commonly applies to the market of
goods and services and addresses economics and individual issues. One of the fundamental
topics of microeconomics is “Demand, Supply and Equilibrium”. Understanding of this
fundamental topic helps to understand how market works (Cowell, 2018) The principle of
demand and supply gives idea regarding movement of market equilibrium and associated
price and quantity. The report evaluates two articles related to the chosen topic. The first
article discusses supply shortage of legal cannabis in Canada and its likely outcome. The
second article addresses issues related to demand and supply of rental housing market in
Canada. The main issues of the two articles are evaluated in light of economic concepts of
demand and supply and factors influencing demand, supply and prices in the two market.
Demand, supply and equilibrium
The term demand is used to identify the amounts of goods and services that people are
willing to purchase at a price given their ability to do so. The quantity demanded of a good
has an inverse association with price as indicated by law of demand (Friedman, 2017).
Demand curve of a good thus is given by a downward sloping curve. Supply of a good or
service on the other hand describes different quantities of goods and services that sellers are
willing to supply in the market at different price. Supplied quantity of a good is positively
related to its price as stated by the law of supply, Supply curve thus is shown by an upward
sloping curve. In a free market demand and supply work independently. Equilibrium in the
market is set where demand matches to the available supply. The price that equates demand
and supply in the market is termed as equilibrium price (Baumol & Blinder, 2015). Available
quantity at this price is known as equilibrium quantity. Price works as an invisible hand to

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maintain stability in the market. At any price above the equilibrium, there is an excess supply
in the market. This creates a downward pressure on price and moves price moves
equilibrium. At a price below the equilibrium, quantity demanded exceeds the quantity
supplied. To meet the supply shortage price moves up towards equilibrium. Factors causing a
change in demand and supply leads to a change in state of equilibrium position in the market
and associated price and quantity (Cowen & Tabarrok, 2015).
Figure 1: Demand, Supply and Equilibrium
(As created by author)
Summary of the article
“Canada-wide cannabis shortages could last years, producers warn”
The cannabis market of different provinces of Canada is now experiencing a supply
shortage which is likely to persist in upcoming years. These provinces include British
Columbia, Alberta, Manitoba, Quebec, Saskatchewan, New Brunswick and Nova Scotia. In

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New Brunswick, more than half of the stores are forced to be closed temporarily. In Quebec,
the Cannabis Corporation has cut the hours of store openings. Because of a lack of product,
the legal store in Labrador was forced to be closed temporarily. As stated by CEO of a
cannabis company in Toronto that the ongoing problem of supply shortfall in legal cannabis
is partly due to imposition of strict regulation by Health Canada on licensed producers of
Canada and need for a considerably longer time to develop a quality product (Thomson,
2018). Additionally, it takes a considerably longer time for federal government to approve
licenses. The regulation to grow cannabis is the most difficult in Canada compared to any
other regions in world. Another factor contributing to supply shortage is the weak links of
supply chain. It has been observed that many companies may did stockpile cannabis, however
distribution has been held up because of delay in packaging and shipping (bnnbloomberg.ca,
2019). In many industries despite considerable consumer demand, it is found that inventory
periods are either running low or running out. The shops actually sell faster than producers
ability to further supply cannabis. The shortage of a product thus is likely to be turned out an
economy wide challenge.
“Rental Housing Market Grows Tighter As Demand Outstrips Supply, CMHC Says”
The overall vacancy rate in Canada has dropped following a faster growth of demand
for rental houses compared to its supply. The vacancy rate at the end of 2018 was 2.4 percent
compared to a vacancy rate of 3 percent in 2017. There are several factors that contribute to
an increase in demand for rental housing. These include enhancement of youth employment,
international migration and ageing population. The Canada Mortgage and Housing
Corporation states that rental housing demand is growing at a faster pace than supply. In
October 2018, the number of occupied rental housing increased by 2.5 percent as against 1.9
percent in the previous year. Vacancy rate has increased significantly in provinces such as
Ontario, British Columbia and Manitoba. In contrast the states such as Quebec,

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Saskatchewan, Alberta and Atlantic experienced a decline in vacancy rates
(huffingtonpost.ca, 2018). Toronto and Vancouver recorded a low and stable vacancy rates of
1.1% and 1% respectively. The demand side pressures result in faster increment of rent.
Between October 2017 and October 2018, average rent increased by 3.5 percent. The largest
increase in rent has been observed in British Columbia with rent climbed up by 9.4 percent.
The higher average monthly rent is recorded in Vancouver followed by Toronto and Calgary
(cbc.ca., 2018) Difference regions of Quebec have recorded the lowest average monthly rent.
Economic analysis of the article
The first article focuses on Cannabis market in Canada. A free market is characterized
by the balance between demand and supply. Shortage of supply refers to situation where
supply falls short of demand. This is what Canada’s cannabis market is experiencing in recent
years. The legalized cannabis producers are unable to supply cannabis to the local stores
causing shortage of supply (cbc.ca, 2019). The contraction of supply given the demand leads
to an inward shift of the supply curve. One primary reason for supply shortage is
implementation of tough regulation by Health Commission. Growing Cannabis involves
considerable time lag which is another factor causing a shortage of supply. In many cases,
despite enough supply of Cannabis, these are not reached to the stores due to delay is
packaging and shipping. Low inventory also causes insufficient supply in the market
compared to consumer demand. The figure below shows supply shortage in the cannabis
market and its likely consequences on market equilibrium.

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Figure 2: Supply shortage in Cannabis market
(as created by Author)
The figure above describes present state of cannabis market in Canada. The respective
demand and supply curve of cannabis is given as DD and SS respectively. In the figure E
indicates point of initial equilibrium. With sufficient supply of cannabis, the supply curve
shifts to the left (Mochrie, 2015). The point of new equilibrium is at E1. The supply shortage
in the market is likely to increase equilibrium price up to P1 while reduces equilibrium
quantity to Q1.
The second article is about rental housing market of Canada. The article finds out
mismatch between demand and supply in the rental market. The demand for rental houses has
outpaced availability of vacant house. The vacancy rate in recent year has shown a marked
increase compared to previous year. Ageing population, growth in youth employment and
increasing flow of international migrants are some factor causing demand of housing to grow
at a faster pace (Gibillini, 2018). This shifts the demand curve of housing to the right. The
figure below illustrates the state of rental housing market in Canada.

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Figure 3: Rental housing market in Canada
(as created by Author)
In the above figure DH and SH show the respective demand and supply of rental
housing in Canada. Equilibrium is at EH with rent being R* and equilibrium number of
houses being H*. With increase in demand for rental housing, the demand curve shifts to the
right to DH1. The new equilibrium is at EH1 (Nicholson & Snyder, 2014). An increase in
demand for rental housing thus increases equilibrium rent to R1. This is the reasons why
provinces like Toronto, British Columbia, Vancouver and others experience an increase in
average rental rate.
Conclusion
The report discusses the microeconomic concepts of demand, supply and equilibrium
and its implication on market price. Demand of a commodity models choice of buyers while
supply captures the choice of sellers. The two forces interact to determine equilibrium in a
free market. It is the mechanism of price that restores stability in market equilibrium. In order
to evaluate the economic concepts practically the report chose two article discussing demand

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and supply of two different market of Canada. The first article discusses state of cannabis
market while the second article discusses rental housing market. In both the market, currently
exists a mismatch between demand and supply. In the cannabis market the mismatch is due to
insufficient supply. In the housing market the mismatch is caused by excessive demand side
pressure leading to higher average rent.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
bnnbloomberg.ca. (2019). Cannabis Canada Daily: Pot supply shortage could last five years -
Article - BNN. Retrieved from https://www.bnnbloomberg.ca/cannabis-canada-daily-
pot-supply-shortage-could-last-five-years-1.1202243
cbc.ca. (2018). Gap between housing supply and demand largest in Toronto and Vancouver:
CMHC | CBC News. Retrieved from https://www.cbc.ca/news/business/cmhc-
housing-report-1.4525123
cbc.ca. (2019). Canada's chronic shortage of legal cannabis expected to drag out for years |
CBC News. Retrieved from https://www.cbc.ca/news/business/canada-cannabis-
shortage-years-1.4988195
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Gibillini, N. (2018). Why 2019 could be one of Toronto renters' toughest years yet - BNN
Bloomberg. Retrieved from https://www.bnnbloomberg.ca/why-2019-could-be-one-
of-the-toughest-years-yet-for-toronto-renters-1.1188250
huffingtonpost.ca. (2018). Canada Not Building Apartments Fast Enough To Keep Up With
Demand: CMHC. Retrieved from https://www.huffingtonpost.ca/2018/11/28/rental-
housing-cmhc_a_23603489/

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Mochrie, R. (2015). Intermediate microeconomics. Macmillan International Higher
Education.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application.
Nelson Education.
Thomson, A. (2018). Canada-wide cannabis shortages could last years, producers warn.
Retrieved from https://globalnews.ca/news/4662574/legal-marijuana-canada-
shortage-cannabis-producers/