Childcare adjusting to a new, lower-demand, equilibrium

This week, my ECONS102 class is covering supply and demand. Today, we talked about equilibrium, and tomorrow, we will talk about how the market shifts from one equilibrium to another. So, this story from the New Zealand Herald a few weeks ago is timely:

Childcare centres are offering big discounts for new customers as centres open up in fast-growing suburbs just as demand falls due to Covid-19.

Four out of 13 centres in the expanding Kumeū-Huapai area in northwest Auckland are offering 50 per cent discounts for new children who enrol in the next two, three or six months, and a fifth is advertising free fees until the end of July.

Early childhood planning consultant Logan Whitelaw says discounting is also occurring in Silverdale and Beachlands in Auckland, and at Rolleston near Christchurch.

In all those places, new centres have just opened or are about to open at a time when many parents have pulled back from daycare because they have lost their jobs, are working more from home or are still worried about the risk of children catching Covid-19.

Parents "pulling back from daycare" has led to a decrease in the demand for daycare. We can illustrate this using a diagram, shown below. The equilibrium price was initially P0, and there were Q0 days of childcare 'traded' in the market. Then demand decreases from D0 to D1. Childcare centres could try to keep their price high at the initial price of P0. The problem with that is that families will now only demand Qd days of childcare (that is the quantity demanded on the new demand curve D1, when the price is P0). The childcare centres are still expecting to supply Q0 days of childcare, so many of them are going to be empty. Rather than having an empty (or mostly empty) centre, it is better for the childcare centres to try to attract some of the families who do want childcare. They can do that by offering a discount, as the news story suggests is happening. The price of childcare starts to fall. How far will it fall? Childcare centres will still have more places available than children filling them all the way until the price has dropped to the new equilibrium price of P1. At that new, lower, price, the quantity of childcare days demanded (Q1) is exactly equal to the quantity of childcare days supplied (also Q1).

The discounts will likely be temporary though. When the world has returned to something more resembling normality, and employment has returned closer to previous levels, demand for childcare will increase, and the process will be reversed - the equilibrium price of childcare will go back up towards P0.