Farid Abolhassani Supply and Price Determination 4

Learning Objectives After working through this chapter, you will be able to: List the factors which influence the supply of a product Show graphically how changes in supply factors influence supply Explain how price is determined by the forces of supply and demand List some advantages of markets as a method of resource allocation Give examples of health care markets Describe the consequences of price regulation, subsidies and indirect taxation by the government

Key Terms Market equilibrium: A situation where the price in a given market is such that the quantity demanded is equal to the quantity supplied. Operational (technical, productive) efficiency: Using only the minimum necessary resources to finance purchase and deliver a particular activity or set of activities (i.e. avoiding waste). Quantity supplied: The amount of a good that producers plan to supply at a given price during an identified period. Subsidy: A payment made by the government to a producer or producers where the level of payment depends on the exact level of output. Supply curve: A graph showing the relationship between the quantity supplied of a good and its price when all other variables are unchanged.

Supply (Definition) If a firm supplies a good or a service, the firm 1. Has the resources and technology to produce it, 2. Can profit from producing it, and 3. Plans to produce it and sell it.

Quantity Supplied The amount that producers Plan to sell During a given time period At a particular price.

The Law of Supply Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied

Supply Curve

PPF and Marginal Cost

Supply Schedule

Marginal Cost / Revenue Marginal Cost/Revenue (Pounds per disc)

A Change in the Quantity Supplied versus a Change in Supply

Determinants of Supply 1. The prices of factors of production 2. The prices of related goods produced 3. Expected future prices 4. The number of suppliers 5. Technology: the way that factors of production are used to produce a good

Related Goods from Production Point of View Substitutes: Goods that can be produced by using the same resources Complements: Goods that must be produced together

A Change in the Quantity Supplied versus a Change in Supply  The prices of factors of production   The prices of substitute goods   The prices of complement goods   Expected future prices   The number of suppliers   Technology 

Market Equilibrium

The Effects of a Change in Demand

The Effects of a Change in Supply

The Effects of an Increase in Both Demand and Supply Example: Provider induced demand Growth of cosmetic surgery Example: Provider induced demand Growth of cosmetic surgery

Consequences of Price Ceiling Waiting lists Under-the-table charges Charges for hidden extras Diminished quality Price Ceiling

Consequences of Minimum Wage Reduction of the number of receptionists employed Reduction of the number of paid hours. Imposing search costs on individuals seeking receptionist work. Worsening working conditions for those who are able to retain their positions e.g. being expected to work longer hours without additional pay. Some employers may illegally continue to pay wages that are below the minimum wage. Provision of fewer services due to increased cost Minimum Wage

Subsidies Consumer’s benefit of subsidy Producer’s benefit of subsidy

Demand Responsiveness to Price and Subsidies High ResponsivenessLow Responsiveness