Chapter 5 — Further Reading

On supply and demand

Alfred Marshall, Principles of Economics, 8th edition, 1920 (originally 1890) Marshall is the economist who put supply-and-demand in the form modern textbooks use it. Book V of his Principles is the original treatment, and it remains surprisingly readable. The famous "scissors" metaphor (each blade — supply or demand — needs the other to do anything) is in this book. Free online.

Léon Walras, Elements of Pure Economics, 1874 Walras, working independently of Marshall, formalized the mathematical conditions for general equilibrium across multiple markets. The book is more technical than Marshall's but it's the founding document of the formal modeling tradition that runs through modern economics.

Carl Menger, Principles of Economics, 1871 Menger, the founder of the Austrian school, developed the concept of marginal utility independently of Marshall and Jevons. His treatment is less mathematical than the Marshall-Walras tradition but more attentive to the subjective basis of value.

On the housing market case study

Robert Shiller, Irrational Exuberance, Princeton University Press, 2000 (3rd edition 2015) Shiller, the 2013 Nobel laureate, is the co-creator of the Case-Shiller home price index and the most influential analyst of asset bubbles in modern economics. The book covers the dot-com bubble in its first edition and the housing bubble in its second; the third edition adds the post-2008 recovery and a discussion of bond markets. The "irrational exuberance" framing is a direct challenge to the assumption that markets always reach efficient equilibria.

Atif Mian and Amir Sufi, House of Debt, University of Chicago Press, 2014 A careful empirical study of the 2008 financial crisis through the lens of household debt. Mian and Sufi argue that the collapse of housing wealth was the dominant driver of the recession that followed, more so than the financial-sector crisis itself. The book is technical in places but the introduction and conclusions are accessible.

Tim Geithner, Stress Test: Reflections on Financial Crises, Crown, 2014 A memoir by the former Treasury Secretary who managed the 2008 financial crisis response. The book gives a real-time view of how policymakers thought about the housing market, supply-demand dynamics, and the failure of equilibrium-restoring mechanisms during the crisis.

Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, 2009 A comparative-history view of financial crises, including housing crises, across centuries and countries. The 2008 episode is shown to fit a pattern that has played out many times before. The book is also famous (or infamous) for the "90% debt threshold" claim that turned out to be based on a coding error — see Chapter 32 for the full story.

On the role of equilibrium in economic theory

Paul Samuelson, Foundations of Economic Analysis, Harvard University Press, 1947 Samuelson's PhD thesis, which formalized much of the economic theory we still use. The book is mathematically demanding but the introduction lays out clearly how Samuelson thought about the role of equilibrium concepts in economic analysis.

Kenneth Arrow and Gerard Debreu, "Existence of an Equilibrium for a Competitive Economy," Econometrica, 1954 The famous proof that, under certain conditions, a general equilibrium exists for a competitive economy. The math is graduate-level, but the conceptual point is foundational: equilibrium is not a metaphor but a mathematical object whose existence can be proved (under specific assumptions).

John Sutton, Marshall's Tendencies: What Can Economists Know?, MIT Press, 2000 A philosophical examination of how economic models like supply-and-demand can be tested and what they can be expected to tell us. Sutton is honest about the limits of the framework while defending its usefulness.

On behavioral departures from the standard model

Richard Thaler, Misbehaving: The Making of Behavioral Economics, W. W. Norton, 2015 Thaler, the 2017 Nobel laureate, tells the story of how behavioral economics emerged from a series of careful empirical observations that the standard supply-and-demand model could not explain. The chapter on the "endowment effect" is especially relevant to the housing case study — sellers value their own homes more than buyers value the same homes, which contributes to price stickiness.

Daniel Kahneman, Thinking, Fast and Slow, Farrar, Straus and Giroux, 2011 Kahneman's account of his decades of work with Amos Tversky on cognitive biases. Loss aversion (the human tendency to weight losses more heavily than equivalent gains) is the most-cited finding for understanding why housing markets can fail to reach equilibrium quickly. We will revisit this in Chapter 10.

Modern textbook treatments

N. Gregory Mankiw, Principles of Microeconomics, Cengage, multiple editions Mankiw's textbook is the gold standard, and the supply-and-demand chapter is one of his clearest. Read it as a complement to ours — Mankiw covers some of the same ground in a slightly different voice, and seeing the same idea explained twice can help it stick.

Paul Krugman and Robin Wells, Microeconomics, Worth Publishers, multiple editions Krugman and Wells's treatment of supply and demand is also excellent and is more attentive to behavioral departures than Mankiw's.

Tyler Cowen and Alex Tabarrok, Modern Principles: Microeconomics, Worth Publishers, multiple editions Cowen and Tabarrok run the Marginal Revolution University video series and have a textbook with a more contemporary tone. Their supply-and-demand chapter is short and lively.

On housing affordability (preview of Chapter 36)

Edward Glaeser, Triumph of the City, Penguin Press, 2011 Glaeser, the most influential urban economist of his generation, argues that cities are the engine of modern prosperity but that bad housing policy (especially exclusionary zoning) is making them less affordable. We will use his framework in Chapter 36.

Conor Dougherty, Golden Gates: The Housing Crisis and a Reckoning for the American Dream, Penguin Press, 2020 A New York Times reporter's account of the housing affordability crisis in the Bay Area. Vivid and human, with the supply-and-demand framework lurking just beneath the surface of every chapter.

The Up for Growth report, ongoing (upforgrowth.org) A regularly-updated estimate of how much housing the U.S. is short of, broken down by metro area. Useful for seeing how supply constraints have created the conditions for the rent increases we now see in cities like Millbrook (and yours).

A reading order recommendation

If you have time for one of the books above before continuing to Chapter 6, read Robert Shiller's Irrational Exuberance. It's the most directly relevant follow-up to the housing case study and the most influential critique of the assumption that supply-and-demand always reaches efficient equilibria.

If you want to develop your sense of how supply-and-demand can fail in subtle ways, read Mian and Sufi's House of Debt as a companion to Chapter 28.

Chapter 6 — Elasticity — is next. It's much more technical than Chapter 5 in some ways (you'll be calculating things) but much shorter in feel. After Chapter 6, you'll have the two halves of the toolkit: the qualitative framework of supply and demand (Chapter 5) and the quantitative measure of how big the responses are (Chapter 6). Together they let you do almost any market analysis at the introductory level.