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# EPH 650 Chapter 2: Supply and Demand

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## Davina Tolbert

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#### Transcript of EPH 650 Chapter 2: Supply and Demand

Best Fit Procurement Model
The starting point of every production depends on
Procurement.

It deals with with
external resources
brought and used in the
organization
for production.

knowing the
right model
of procurement, can contribute to the
function
of the supply chain design.
The Price Elasticity of Demand
2.2 Supply
Efficiency and Marginal Analysis
Chapter 2:
Questions
Merchandise Flows
Demand
and Supply

The Price Elasticity of Demand
IBM Analytics
"Smarter Commerce"
Supply
EPH 650
Supply Chain is
:
a process where various departments come together to perform certain functions such as buying raw materials from suppliers
.
Economics
Economics
is the study of the choices people make to cope with scarcity.

PPFs
in
Health
Care
PPFs in Health Care - exercise
Production of
health care in a
single hospital
Heart bypass
unit has
10 surgeons
Number of

bypass operations
is a functions

of number

of surgeons

assigned to perform them

The
quantity supplied
of a good or service is the amount that producers plan to sell during a given time period at a particular price.

SUPPLY

The Law of Supply
Other things remaining the same, the higher the price of a good, the greater is the quantity supplied.

Price Elasticity
of
Demand

The \$1.00 price decrease is 5 percent of the average price.

The original price is \$20.50 and the new price is \$19.50, so the average price is \$20.
S
U
P
P
L
Y
Supply
The Price Elasticity of Demand
Calculating Elasticity (cont.)

The original quantity demanded is 9 pizzas and the new quantity demanded is 11 pizzas.

The 2 pizza increase in the quantity demanded is 20 percent of the average quantity.

A Change in Supply

When any factor that influences selling plans other than the price of the good changes, there is a

change in supply.
An increase in supply causes the supply to shift rightward.
A decrease in supply causes the supply curve to shift leftward.

The Price Elasticity of Demand
Price of Productive Resources
Price of Related Goods Produced
Substitutes in Production
Complements in Production
Expected Future Prices
The Price Elasticity of Demand
Fundamental Economic Concepts
The Price Elasticity of Demand
Economic principles for studying the market for health care
Scarcity of resources
Opportunity cost
Efficiency (Marginal Analysis)
Demand and Supply
Elasticity of demand
Market structure

The
resources

that
are
used

to
produce
goods

and
services
are:

Limited Resources
Entrepreneurship

Capital
Land
Labor
Labor
The
time

and
effort
that

we
devote
to

producing
goods
and

services.
Land
The

of
nature
that

we
use
to

produce
goods
an
d
services.

Capital

The goods we use to produce other goods and services.
Includes physical capital
-interstate highways, buildings, and dams
and human capital

-the knowledge and skill that people obtain from education and on-the-job training

Limited Resources
DEMAND
The
Law
of
Demand

Other things
remaining the same,
the higher the price
of a good,
the smaller is
the quantity demanded.
Reasons
for the

Law of Demand
Substitution Effect
Income Effect

D
e
m
a
n
d
A Change in Demand

When any factor that influences buying plans other than the price of the good changes, there is a
change in demand.
An increase in demand causes the demand curve to shift rightward.
A decrease in demand causes the demand curve to shift leftward.

2.2 Supply
Equilibrium

in a market
occurs when the

price balances the plans
Equilibrium price

is the price at

which quantity
demanded equals
quantity supplied.

Market Equilibrium
Equilibrium quantity

is the

quantity bought

and sold
at the
equilibrium price
.

What determines selling plans?
The price of the good.
The prices of resources used to produce the good.
The prices of related goods produced.
Expected future prices.
The number of suppliers.
Technology
SUPPLY
SUPPLY
SUPPLY
SUPPLY
Market Equilibrium
Price as a
Regulator
If the price
is too low,

quantity demanded
exceeds quantity supplied.
If the price

a is too high,
quantity supplied exceeds
quantity demanded.

A
shortage
forces
the price up.
A
surplus
forces
the price down.
Such price changes are mutually beneficial to both buyers and sellers.
Market Equilibrium

1. Is price the only thing that matters? What is the difference between price and value ?
2. What is the difference between Mr. Axel’s demand for physical therapy, and his need for physical therapy?
3. Why would a life-saving cardiac drug cost less than one providing only temporary symptomatic relief ?
4. Do buyers and sellers face the same demand curve?
5. Can better quality actually decrease demand?
6. Which is more sensitive to price changes—one person, one firm, or the whole market
7. Do politicians face demand curves?
Health Economics
Entrepreneurship

The
resource

that

organizes

labor,
land,

and
capital.

Resources, Production Possibilities, and Opportunity Cost
The
production possibilities frontier
is used to illustrate the maximum quantity of two goods that can be produced due to
scarcity
.

Production Possibility Frontier
D
e
m
a
n
d
A Change in Demand
Price of Related Goods
Substitutes - goods used in the place of another good
Complements - goods used in conjunction with another good
What Happens to Demand if the price of a substitute good increases? A complement?

A Change in Demand
Expected Future Prices
If the price of a good is expected to rise in the future, people buy more of the good now.
If the price of a good is expected to fall in the future, people buy less of the good now.

A Change in Demand
Income
Normal Goods — demand increases as income increases
Inferior Goods — demand decreases as income increases

Figure 2.2
Figure 2.1
Population
Size and age structure

Preferences
Attitudes toward goods and services
A Change in Supply
The Number of Suppliers
Technology

Figure 2.5
Figure 2.4
D
em
an
d
-- E
xe
rc
is
e
Explain how an individual’s Demand curve for medical care will change (i.e., shift) if the following things happen. Consider each change individually, holding all other possible influences constant.
Income increases
Aging
You obtain more comprehensive insurance such that your out-of-pocket cost per doctor’s visit is lower

Express the changes in price and quantity demanded
as percentages of the
average price
and the
average quantity
.

Percent change in price

Price elasticity of demand=

Calculating Elasticity

Percent change in quantity demanded

Calculating Elasticity (cont.)

= (\$1/\$20) x 100 = 5%

P/Pavg

= (2/10) x 100 = 20%

Q/Qavg

4

=

5%

20%
=

Calculating Elasticity (cont.)

Price Elasticity of Demand
A Units-Free Measure
Elasticity is a units-free measure because the percentage change in each variable is

independent

of the units in which the variable is measured.
And the ratio of the two percentages is a number without units.
The
Price

Elasticity

of
Demand
Price elasticity -- 3 possibilities
Price elastic = percentage change in quantity demanded > percentage change in price But, it is the
magnitude
, or absolute value, of the price elasticity of demand that tells us how elastic demand is.
We use the magnitude and
ignore
the minus sign.

Using Resources Efficiently

Marginal cost
The opportunity cost of producing one more unit of a good or service.
The marginal cost of admitting one more person for maternity care is the value of the geriatric/aging adult care that must be given up to accommodate the maternity patient— i.e., the opportunity cost.

Using Resources Efficiently

Marginal cost
The opportunity cost of producing one more unit of a good or service.

The marginal cost of admitting one more person for maternity care is the value of the geriatric/aging adult care that must be given up to accommodate the maternity patient— i.e., the opportunity cost.
MC

Opportunity Cost and Marginal Cost

The additional costs incurred from the decision to produce or consume something will be offset by the benefits the decisionmaker gets from her/his choice

Let’s simplify this example and think like consumers – not of medical care, but of pizza!

You find yourself on Lincoln Road, walking by Pizza Rustica and catch a whiff of a freshly baked pie coming out of the oven…

Comparing costs and benefits

Marginal Benefit

Marginal benefit
The benefit that a person receives from consuming one more unit of a good or service.
It is measured as the maximum amount that a person is willing to pay for one more slice of pizza

Decreasing Marginal Benefit =
The more we have of any one good or service, the smaller is our marginal benefit.
Decreasing
marginal
benefit from pizza.

MB

5

4

3

2

1

Willingness-to-pay per slice

0 1 2 3 4 5

Slices of pizza

Marginal Benefit

So – how many slices of pizza should we purchase? In other words, what is the efficient number of slices?
Efficiency
Implies that we cannot produce/consume any more of a good without giving up something that we value even more highly.

To estimate how efficient our choices are, we compare the marginal cost to the marginal benefit.

Efficient Use of Resources
If the marginal benefit of the last unit of a good exceeds its marginal cost, we increase production (or consumption) of that good.

If the marginal cost of the last unit of a good exceeds its marginal benefit, we decrease production (consumption) of that good.
2.1 The Demand Curve
If a person demands something, they:

Want it.
Can afford it.