Friday, March 03, 2006

And You Thought Applying to College Was Hard



Imagine going to Yale for your undergrad, Harvard for your master's, and then having to write the most competitive application essay of your life--for your 18-month-old.

For years, the child population of New York City was in decline, and the number of preschools similarly declined. Recently, however, the number of children has risen by over 25% in the past five years, causing a massive shortage in the preschool market. This article in the New York Times details some of the effects of the shortage, which illustrate many of the same effects that we learn about in our principles of economics course:

  • The price of preschool has risen to over $10,000 per year for a three-year-old.
  • Consulting firms have arisen to help parents place their children in preschools.
  • Parents are asked to write essays, interview for positions, and pay steep application fees.

Can you interpret the article using an economic model? Here are some steps to get you started:

1. Draw the supply and demand for preschool slots in 2000. Then draw the same curves for 2005. Did one or both curves shift? What is the effect on price and quantity?

2. What happens to preschools' profits during a baby boomlet? What effect does this have on the number of preschools that are operating? Show the long-run effect of these higher prices in your supply and demand curves above.

3. We learn in principles of economics that competitive markets allocate goods and services to those with the highest willingness to pay. Is that the case when there is a shortage? What mechanisms mentioned in the article do preschools use to ensure that they offer their slots to the parents who are willing to pay the most?

4. Suppose New York City decided that poor parents were unable to afford daycare, so they put a price cap on preschool at $5,000 per year. What would the effect on the market be?

Topics: Supply and Demand, Equilibrium, Shortage

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