Section 01: Supply and Demand

Using Money As Rationing Device In Real World Crossword
Using Money As Rationing Device In Real World Strategy

Managed Care, Rationing, And Quality: A Tangled Relationship. Hospitals and Health Networks and the Healthcare Forum Journal and section editor of the Journal of the. Rationing is inevitable in a world with finite resources. We do it in this country, too, and it is still one of the least fair and most inefficient rationing systems in the world. Rationing using ration stamps is only one kind of non-price rationing. For example, scarce products can be rationed using queues. This is seen, for example, at amusement parks, where one pays a price to get in and then need not pay any price to go on the rides.

Supply and Demand

Teach a parrot the terms of 'supply and demand' and you’ve got an economist.
-- Thomas Carlyle

A market brings together and facilitates trade between buyers and sellers of a good or services. These markets range from bartering in street markets to trades that are made through the internet with individuals around the world that never have met face to face.

A market consists of those individuals who are willing and able to purchase the particular good and sellers who are willing and able to supply the good. The market brings together those who demand and supply the good to determine the price.

For example, the number of many apples an individual would be willing and able to buy each month depends in part on the price of apples. Assuming only price changes, then at lower prices, a consumer is willing and able to buy more apples. As the price rises (again holding all else constant), the quantity of apples demanded decreases. The Law of Demand captures this relationship between price and the quantity demanded of a product. It states that there is an inverse (or negative) relationship between the price of a good and the quantity demanded.

Demand Curve

Recall, that we represent economic laws and theory using models; in this case we can use a demand schedule or a demand curve to illustrate the Law of Demand. The demand schedule shows the combinations of price and quantity demanded of apples in a table format. The graphical representation of the demand schedule is called the demand curve.

When graphing the demand curve, price goes on the vertical axis and quantity demanded goes on the horizontal axis. A helpful hint when labeling the axes is to remember that since P is a tall letter, it goes on the vertical axis. Another hint when graphing the demand curve is to remember that demand descends.

The demand curve reflects our marginal benefit and thus our willingness to pay for additional amounts of a good. It makes sense that our marginal benefit, or willingness to pay for a good, would decline as we consume additional units because we get less additional satisfaction from each successive unit consumed. For example, at lunch time you decide to buy pizza by-the-piece. You'd be willing to pay a lot for that first piece to satisfy your hunger. But what about the second piece? Perhaps a little less. If we keep considering each additional piece, we might ask what the 3rd, 4th or 5th piece is worth to you. By that point, you'd be willing to pay less, perhaps much less. The law of demand and our models illustrate this behavior.

A more formal examination of the law of demand shows the most basic reasons for the downward sloping nature of demand. The first is the substitution effect which states that as the price of the good declines, it becomes relatively less expensive compared to the price of other goods and thus the quantity demanded is greater at a lower price. When the price of the good rises, the opposite occurs; that is, as the price of the good becomes relatively more expensive compared to other goods a lower quantity will be demanded. For example, as the price of apples increases or decreases, apples become relatively more or less expensive compared to other goods, such as oranges. Thus if the price of apples declines, consumers will buy more apples since they are relatively less expensive compared to other goods, such as oranges.

The second factor is the income effect which states that as the price of a good decreases, consumers become relatively richer. Now, their incomes have not increased, but their buying power has increased due to the lower price. If they continued to buy the same amount, they would have some money left over - some of that extra money could be spent on the good that has the lower price, that is quantity demanded would increase. On the other hand, as the price of a good increases, then the buying power of individuals decreases and the quantity demanded decreases. For example, at 20 cents per apple, we are able to purchase 5 apples for $1 but if the price falls to 10 cents, we would be able to buy 10 apples for $1. Although our income has not changed, we have become relatively richer.

At this point, we have explained why there is an inverse relationship between price and quantity demanded (i.e. we've explained the law of demand). The changes in price that we have discussed cause movements along the demand curve, called changes in quantity demanded. But there are factors other than price that cause complete shifts in the demand curve which are called changes in demand (Note that these new factors also determine the actual placement of the demand curve on a graph).

While a change in the price of the good moves us along the demand curve to a different quantity demanded, a change or shift in demand will cause a different quantity demanded at each and every price. A rightward shift in demand would increase the quantity demanded at all prices compared to the original demand curve. For example, at a price of $40, the quantity demanded would increase from 40 units to 60 units. A helpful hint to remember that more demand shifts the demand curve to the right.

A leftward shift in demand would decrease the quantity demanded to 20 units at the price of $40. With a decrease in demand, there is a lower quantity demanded at each an every price along the demand curve.

Factors of Demand

A change in tastes and preferences will cause the demand curve to shift either to the right or left. For example, if new research found that eating apples increases life expectancy and reduces illness, then more apples would be purchased at each and every price causing the demand curve to shift to the right. Companies spend billions of dollars in advertising to try and change individuals’ tastes and preferences for a product. Celebrities or sports stars are often hired to endorse a product to increase the demand for a product. A leftward shift in demand is caused by a factor that adversely effects the tastes and preferences for the good. For example, if a pesticide used on apples is shown to have adverse health effects.

Another factor that determines the demand for a good is the price of related goods. These can be broken down into two categories – substitutes and complements. A substitute is something that takes the place of the good. Instead of buying an apple, one could buy an orange. If the price of oranges goes up, we would expect an increase in demand for apples since consumers would move consumption away from the higher priced oranges towards apples which might be considered a substitute good. Complements, on the other hand, are goods that are consumed together, such as caramels and apples. If the price for a good increases, its quantity demanded will decrease and the demand for the complements of that good will also decline. For example, if the price of hot dogs increases, one will buy fewer hot dogs and therefore demand fewer hot dog buns, which are complements to hot dogs.

Remember that demand is made up of those who are willing and able to purchase the good at a particular price. Income influences both willingness and ability to pay. As one’s income increases, a person's ability to purchase a good increases, but she/he may not necessarily want more. If the demand for the good increases as income rises, the good is considered to be a normal good. Most goods fall into this category; we want more cars, more TVs, more boats as our income increases. As our income falls, we also demand fewer of these goods. Inferior goods have an inverse relationship with income. As income rises we demand fewer of these goods, but as income falls we demand more of these goods. Although

Using Money As Rationing Device In Real World