Adjusting the Equilibrium Quantity to Equal the "Need"
Sometimes, in public health, you may decide that some people
"need" to use a certain amount of some service. For example, you might
set a goal that everyone should get immunized, or that every pregnant
woman
should get prenatal care.
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 bought and sold is to raise demand. The diagram
above
shows that if you raise demand, you can move the equilibrium quantity out to
the "needed" level. As the diagram also shows, this tends to raise the
price.
For this to work, the supply curve can't be so steep that it does not reach the Need line.
In real life, this would mean that raising demand works if the supply will be forthcoming if the price goes high enough.
The alternative way to get the equilibrium quantity out to the need is to raise supply. This means moving the supply
curve
to the right. As the preceding video showed, raising the supply curve makes
quantity go up and makes the price go down.
For example, suppose that the President decides that war veterans need more health care services than they are currently getting.
The President and Congress could give veterans health insurance that would pay for health care services from the doctors and hospitals that the general public uses. Would that move the demand curve or the supply curve? Demand. This would make demand move to the right as in the movie above.
Supply. This would move the supply curve to the right.
The President could order the Veterans Health Administration (a U.S. government agency) to expand and revamp the its medical services for veterans.
Would that move the demand curve or the supply curve? Demand. This would make demand move to the right as in the movie above.
Supply. This would move the supply curve to the right.
Here are some more tactics for manipulating where the supply and demand
curves
cross. See if you can tell which do that by changing demand and which
by changing supply.
You run advertisements telling men that they need get their
prostates
tested. What does this change in the market for prostate examinations?
Raises demand
Raises supply
You give pregnant women coupons for free fast food after they complete
a
certain number of prenatal visits. (Laugh if you like, but this was
actually done in South
Carolina in the 1990s.) What does this change in the market for
prenatal care visits?
Raises demand
Raises supply
You give doctors free vaccine. What does this change in the market for
inoculations?
Raises demand
Raises supply
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 forbid smoking in many places that are open to the public.
In the movie above, I have the demand curve stopping its move to the right when the equilibrium quantity gets to the Need. If the demand curve kept going to the right, the equilibrium quantity would be greater than the Need. Some economists argue that health insurance with no copayment moves the demand curve so far to the right that the equilibrium quantity of services exceeds what people really need.
A digression about sin taxes, like the cigarette tax ...
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?
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.