Supply and Demand Analysis
Healthcare markets are in a constant state of flux. Prices rise and fall. Volumes rise and fall. New products succeeded at first and then fall by the wayside. Economics teaches us that, underneath the seemingly random fluctuations of healthcare markets, systematic patterns can be detected. Understanding these systematic patterns requires an understanding of supply and demand. Even though healthcare managers need to focus on the details of day-to-day operations, they also need an appreciation of the overview that supply and demand analysis can give them. Supply and demand analysis can help managers anticipate the effect of changes in policy, technology, or prices. For example, the impact of added taxes on hospital’s prices, the impact of increased insurance coverage on the output mix of physicians can be analyzed. Supply and demand analysis is valuable as tool managers can use to quickly anticipate the effects of shifts in demand or supply curves.
The supply curve (labeled S) describes how much producers are willing to sell at deferent prices. From another perspective, it describes what the price must be to induce producers to be willing to sell different quantities. The supply curve slopes up, as do most supply curves.
This upward slope means that, when the price is higher, producers are willing to sell more of a good or service, or more producers are willing to sell a good or service. When the price is higher, producers are more willing to add workers, equipment, and other resources to sell more. In addition, higher prices allow firms to enter a market they could not enter at lower prices.
The demand curve (labeled D) describes how much consumers are willing to buy at different prices. From another perspective, it describes how much the marginal consumer (the one who would not make a purchase at a higher price) is willing to pay at different levels of output. The demand curve slope down, meaning that, to sell more of a product, its price must be cut. It also means that consumers who are willing to purchase a product only at a low price do not place a high value on it. Such a sales increase might be the result of an increase in the share of the population that buys a good or service, an increase in consumption per purchase, or some mix of the two.
The demand and supply curves intersect at the equilibrium price and quantity. At the equilibrium price, the amount producers want to sell equals the amount consumers want to buy. Markets tend to move toward equilibrium points. If the price is above the equilibrium price, producers’ sales forecasts will not be met. Sometimes producers cut prices to sell more. Sometimes producers cut production. Either strategy tends to equate supply and demand. Alternatively, if the price is below the equilibrium price, consumers will quickly buy up the available stock. To meet the shortage, producers may raise prices or produce more. Either strategy tends to equate supply and demand. Markets will not always be in equilibrium, especially if conditions change quickly, but the incentive to move toward equilibrium is strong. Producers typically can change prices faster than they can increase or decrease production. A high price today does not mean a high price tomorrow. Prices are likely to fall as additional capacity becomes available. Likewise, a low price today does not mean a low price tomorrow. Prices are likely to rise as capacity decreases.