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

Economics Interactive Lecture (Instructions)

Supply and Demand, part 2

Adjusting the Equilibrium Quantity to Equal the "Need"

We can represent that in the supply and demand diagram with a vertical line at the quantity that we think people need. It's a vertical line because "need" is the same regardless of the price.

When the supply-demand intersection point is to the left of the "need" level, then the amount actually bought or sold is less than the "need." One way to raise the actual amount is to raise demand. The diagram above shows that if you raise demand, and the supply curve isn't too inelastic (isn't too vertical) then you can move the equilibrium quantity out to the "needed" level. As the diagram also shows, this tends to raise the price as well.

The alternative is to raise supply, which means moving the supply curve to the right. As the question before showed, raising the supply curve makes quantity go up, and price go down.

Here are some tactics for manipulating where the supply and demand curves cross. See if you can tell which do that by changing demand and which change supply.

You run radio advertisements telling men that they need get their prostates tested. What does this change in the market for prostate examinations?

You give pregnant women coupons for free fast food after they complete a certain number of prenatal visits. (You can laugh, but this was actually done in South Carolina in the early 1990's.) What does this change in the market for prenatal care visits?

You give doctors free vaccine. What does this change in the market for inoculations?

The same ideas work in reverse if you think people are buying more of something than they need. For example...

You put a scary message of every pack of cigarettes. What does this change in the market for cigarettes?

You put a tax on every pack of cigarettes. What does this change in the market for cigarettes?

You can regard the cigarette tax as increasing the cost of supplying the cigarettes. Adding a tax raises the cost per pack by the amount of the tax. The diagram here shows the effect. The supply curve moves down, which is to the left in this diagram. The vertical distance between the old supply curve (shown in black) and the new supply curve (shown in red) is the amount of the tax per pack. The equilibrium quantity supplied and demanded is lower (more to the left). That is the intended goal of the tax increase.

If the supply curve has a positive slope, so that it's not horizontal (which means that supply is not completely elastic), then the price increase (the distance between the blue and red horizontal lines) will be less than the tax increase. This means that the customers and the sellers will share paying the tax on each pack bought. When a supply curve has an upward slope, it is because some sellers have higher costs than other sellers. When the tax is imposed, some high-cost sellers drop out of the market. The lower-cost sellers who stay in make less profit.

Suppose you make it illegal to sell a certain drug.

Suppose an HMO makes it harder for people to call up to make an appointment. What does that change in the market for that HMO's health insurance policy?

To the list of tutorials
To the Health Services Policy and Management Department page
The views and opinions expressed in this page are strictly those of the page author. The contents of this page have not been reviewed or approved by the University of South Carolina.
http://hspm.sph.sc.edu/Courses/ECON/SD/SD.html