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University of South Carolina, Arnold School of Public Health, Dept. of Health Services Policy and Management

Economics Interactive Lecture (Instructions)

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Supply and Demand

Copyright © 1996-2003 Samuel L. Baker

This program discusses supply and demand. It shows, with a simplified numerical example, how supply and demand in a market interact to determine how much of something is sold and bought, and what the price is.

The crucial ideas are that supply and demand are determined separately. The sellers determine the supply. The buyers determine the demand. In a free competitive market, the price of whatever it is moves up or down until the amount supplied equals the amount demanded. When the price stops moving, you have what is called equilibrium.

Let's consider, for example, the local market for urgent care services. (By "urgent care" here I mean care for conditions that should be looked at soon, but are not immediate threats to life or limb.)
On which side of this market are primary care physicians in office-based practices? Are they on the Demand side or the Supply side?

When doing these tutorials, clicking the wrong answer can sometimes get you additional information.

Once you have the right answer to the above question, try these:

Which of the following are also on that side of the urgent care services market?

The supply side of this market are the providers of urgent care services. They receive money in return for service.

The demand side of this market comprises people with ailments, who may spend money to receive services.

Let's switch our attention to the demand side. When there are illnesses or injuries, people decide whether to seek prompt medical attention. Presumably, they base their decisions on their assessments of how much they are likely to benefit from being seen by a medical professional, versus how much it will cost to be seen. The cost to them includes what the provider makes them pay.  The cost can also include foregone wages, business income, or leisure time, as well as transportation expense.

Here is a made-up demand schedule for these people, perhaps in one small city. Imagine that the table below shows what quantities will be demanded at various prices.  (We hold constant all the other costs that consumers incur, such as foregone wages, etc., as above.)

Price                  Amount Demanded

 $ 55 per visit       100 visits per day
 $ 50 per visit       200 visits per day
 $ 45 per visit       300 visits per day
 $ 40 per visit       400 visits per day
 $ 35 per visit       500 visits per day
 $ 30 per visit       600 visits per day
 $ 25 per visit       700 visits per day
 $ 20 per visit       800 visits per day
 $ 15 per visit       900 visits per day
 $ 10 per visit      1000 visits per day
I've ordered the prices from highest to lowest. This way, the higher prices are higher up on your screen. Just to be sure you understand the table, please answer this: If the going price for an urgent visit is $10, how many visits per day will be demanded? (Click on the box below. Type in your answer. Then press Enter.)

Now let's look at the supply side. The $10 price is evidently attractive to consumers, since so many patients show up at that price.  Let us imagine, however, that a $10 per visit price is not attractive to providers. Imagine that docs, doc-in-boxes, and ER's would accept 0 visits if the price were only $10. Now, at this $10 price, is this market in equilibrium?

Excess demand is the amount demanded minus the amount supplied. At a $10 price, there are 1000 visits per day of excess demand. If excess demand is negative, the amount supplied is bigger than the amount demanded, and you have excess supply.

Excess demand and excess supply are important to the model because they encourage competition that tends to make the price change. Excess demand tends to induce competition among the buyers that forces prices up. Excess supply tends to induce competition among the sellers that forces prices down. Equilibrium is reached when there is no tendency for the price to move either way. At eqilibrium there is no excess demand or excess supply.

Let's put a whole supply schedule on the table. Can you pick which row shows the equilibrium price and quantity? (To see the whole table at once, you may have to hide some tool bars.  The instructions show how to do that.)

Here are two questions about excess supply and excess demand.

Now, to reiterate a point made earlier,
suppose we have excess demand. The price will tend to go which way?

Why does the price go that way when there is excess demand? Here are three possible reasons. For each one, check Yes if it is part of economic theory's explanation for the price change. Check No if it is not.

When prices or quantities change, economists generally seek an explanation in changes in the demand or supply curves. That approach assumes that the market was in equilibrium before the price or quantity change, and that the price adjusts quickly when the supply or demand move. Often, that assumption is a good starting point.

The diagram below shows how movements in demand change the price and quantity if supply holds still.

Higher demand makes both the price and the quantity sold go up. Lower demand makes both the price and the quantity fall.

Now it's time for some visualization. (Pencil and paper might help. Start with the diagram below these two questions. Draw a supply curve and a demand curve.)

Suppose instead that supply moves and demand stays still. What happens to price and quantity when supply goes up? ("Up" means to the right.)

The applet below activates when both of the above applets have been answered correctly.

In the above applet, the words "Supply Rising" are sometimes moving downward on the screen. That is because rising -- up -- is movement to the right. Falling -- down -- is movement to the left.
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