Supply and demand analysis of physician services in competitive healthcare markets

¶ … tenets of the capitalistic economic system is that of supply and demand. In its most basic form, supply and demand is an economic model that determines both price and availability in a given market. In a competitive market, price functions in a way that is designed to equality the quantity demanded by consumers, and the quantity supplied by producers, resulting in economic "equilibrium" of price and quantity (Hazlitt, 1988). In the American healthcare model, managed care has attempted to control the supply and demand curve by modifying individual behavior. When this is focused on prescription drugs, however, demand-side controls involve copayment or coinsurance and may push the consumer towards generic brands. For the open market, however, major pharmaceutical companies posit that without adequate future revenue streams, they will be unable to develop new products in a robust manner -- especially in this highly regulated and competitive market (Kongstvedt, 2003).

Part 2 -- Ironically, as one of the richest nations on earth, our healthcare dollars are not spent in the most efficient manner. Since 1960 healthcare costs have risen drastically, but care in many cases has diminished. Based on a supply and demand model, we see that there has been an increase in demand from an aging population that often requires more care, a larger focus on the health of the nation through initiatives, etc. (stop smoking, etc.), and an increase in costs for that healthcare based on a number of inefficiencies, redundancies, and capitalism. Pharmaceutical companies and companies that manufacture high-tech machines are faced with a dilemma -- do they recoup their costs domestically so R&D can continue, or try to be price oriented. The problem with many machines and advanced technologies is that there is not a large enough market to make the materials manufactured cost-effective. If one has the possibility of selling only 1,000 units to major hospitals, for instance, the price elasticity curve increases (Copeland, 2010).

Part 3 -- We will assume there is legislation allowing for the sale of human organs. Because of the supply and demand curve there will be a relationship between price and volume/need. In general, price elasticity of demand is an economic measurement that shows the responsiveness of the quantity demanded of a good or service to its price. The demand for a good is elastic when is greater than one -- or changes in price have a relatively large effect on goods demanded. Of course there are a number of variables present regarding price elasticity: type of good, luxury or necessity, duration of the market cycle, and availability of that good. In most economic scenarios, though, as price increases, demand decreases; again, depending on where the item was priced in the first place. If we analyze several scenarios, we find that each has a different response to the price and output effects and overall demand curve: