# Supply And Demand In Healthcare Economics

By | August 26, 2023

Supply And Demand In Healthcare Economics – In this section, we combine the supply and demand curves we studied in the new model. The supply and demand model uses supply and demand curves to explain the determination of prices and quantities in the market.

The logic behind the supply and demand model is simple. The demand curve shows the quantity of a particular good or service that buyers want and can afford at any price during a given period. The supply curve shows the amount sellers will offer to sell at each price during the period. By combining the two curves, we should be able to find a price equal to the amount sellers are willing to sell for at which buyers are willing and able to buy.

## Supply And Demand In Healthcare Economics

Figure 3.14 “Determining the Equilibrium Price and Quantity” combines the supply and demand data from Figure 3.1 “Demand Schedule and Demand Curve” and Figure 3.8 “Supply Schedule and Supply Curve”. Two curves intersect at one point. A price of \$6 per pound means supply and demand are equal at this price. Buyers want to buy, and sellers are willing to offer 25 million pounds of coffee per month for sale. The coffee market is in balance. Unless the demand or supply curve changes, prices will not tend to change. The equilibrium price in any market is the price at which the quantity demanded equals the quantity supplied. So, the equilibrium price in the market for coffee is \$6 per pound. The equilibrium quantity is the amount supplied and demanded at the equilibrium price.

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When the demand and supply curves for a good are combined in one graph, their intersection points determine the equilibrium price and equilibrium quantity. Here, the equilibrium price is \$6 per pound. At this price, consumers demand 25 million pounds of coffee per month, and suppliers supply.

With an upward-sloping supply curve and a downward-sloping demand curve, there is only one price at which the two curves intersect. This means that there is only one price at which equilibrium is reached. Therefore, the market is not in equilibrium at any price other than the equilibrium price. Next, we consider what happens to prices other than the equilibrium price.

Figure 3.15 “Surplus in the Market for Coffee” shows the supply and demand curves we just looked at, but this time the initial price is \$8 per pound of coffee. Since there is no equilibrium between the quantity demanded and the quantity supplied, this price is not an equilibrium price. At a price of \$8, we read the demand curve to determine the amount of coffee that the 15 million pound consumer is willing to buy per month. The supply curve tells us what sellers are offering for sale—35 million pounds per month. The difference, which is 20 million pounds of coffee per month, is called a surplus. In general, a surplus is the amount supplied exceeds the quantity demanded at the current price. Of course, there would be no surplus at the equilibrium price; a surplus occurs only if the current price exceeds the equilibrium price.

At a price of \$8, the quantity supplied is 35 million pounds of coffee per month and the quantity demanded is 15 million pounds per month; There is a surplus of 20 million pounds of coffee per month. Given the surplus, the price falls rapidly towards the equilibrium level of \$6.

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The lead in the coffee market would not last long. With unsold coffee on the market, sellers started to lower their prices to clear the unsold coffee. When the price of coffee starts to fall, the quantity of coffee offered starts to decrease. At the same time, the demand for coffee started to increase. Remember that decreasing shipping numbers is a movement

Supply curve—the curve itself does not shift in response to a decrease in price. Likewise, an increase in demand is a movement

Demand curve—the demand curve does not shift in response to a decrease in price. Prices will continue to fall until they reach an equilibrium level where the supply and demand curves intersect. At the moment, there will be no further downward price trend. Generally, market gains are short-lived. The prices of many goods and services adjust rapidly, eliminating surpluses. Later we will discuss some markets where price correction to equilibrium may be very slow or not possible at all.

Just as a price above the equilibrium price creates a surplus, a price below the equilibrium price creates a shortage. Shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price.

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Figure 3.16 “Shortage in the Coffee Market” shows the shortage in the coffee market. Let’s say the price is \$4 per pound. At this price, 15 million pounds of coffee would be shipped per month, and 35 million pounds per month would be needed. When more coffee is demanded than supplied, a shortage occurs.

At \$4 per pound, the quantity of coffee demanded is 35 million pounds per month, and the quantity supplied is 15 million pounds per month. As a result, there was a shortage of 20 million pounds of coffee per month.

If there is a shortage, sellers can start raising prices. As price increases, the quantity supplied increases (but not the change in supply) and demand decreases (but not the change in demand) until an equilibrium price is reached.

Changes in demand or supply change the equilibrium solution in the model. Panels (a) and (b) show increases and decreases in demand, respectively; Panels (c) and (d) show increases and decreases in supply, respectively.

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In any supply and demand model, a constant change in one of the variables (drivers) causes a change in supply and demand. Shifts in the demand or supply curve change the equilibrium price and equilibrium quantity for a good or service. Figure 3.17 “Changes in supply and demand” combines the information on changes in demand and supply of coffee presented in Figure 3.2 “Increased demand” Figure 3.3 “Decreased demand” Figure 3.9 “Increased supply” and Figure 3.10 “Decreased supply” In each initial case, the equilibrium price is \$6 per pound, and the corresponding equilibrium quantity is 25 million pounds of coffee per month. Figure 3.17, Changes in Supply and Demand, shows what happens when demand increases, demand decreases, supply increases, and supply decreases. Then we consider what happens if both curves shift at the same time. Each of these features is discussed in turn below.

An increase in the demand for coffee shifts the demand curve to the right, as shown in panel (a) of Figure 3.17, Changes in Supply and Demand. The equilibrium price rises to \$7 per pound. When the price rises to the new equilibrium level, the quantity supplied increases to 30 million pounds of coffee per month. Note that the supply curve is inelastic; instead, there is a movement along the supply curve.

Shifts in demand that lead to increased demand include shifts in preferences leading to greater consumption of coffee; low-priced coffee toppings such as donuts; higher prices for coffee substitutes such as tea; increased revenue; and population growth. Changes in buyer expectations, perhaps due to bad weather forecasts, expected production reductions at coffee factories and future increases in coffee prices, can increase current demand.

Panel (b) of Figure 3.17 Changes in Supply and Demand shows that a decrease in demand shifts the demand curve to the left. The equilibrium price falls to \$5 per pound. When the price drops to the new equilibrium level, the quantity supplied will decrease to 20 million pounds of coffee per month.

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Shifts in demand that reduce demand for coffee include shifts in preference where people want to consume less coffee; increase in the price of supplements such as donuts; a reduction in the price of substitutes such as tea; decrease in income; population decline; and changes in buyer expectations that lead one to expect future coffee prices to fall.

An increase in the supply of coffee shifts the supply curve to the right, as shown in panel (c) of Figure 3.17, Changes in Supply and Demand. The equilibrium price falls to \$5 per pound. When the price falls to the new equilibrium level, the quantity of coffee demanded increases to 30 million pounds of coffee per month. Notice that the demand curve is inelastic; instead, there is a movement along the demand curve.

Supply switches that might increase supply include downsizing