Introduction to Health Economics Price of Free Things
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Outline Demand curves Supply curves Shift of demand curve Shift of supply curve Subsidies Why and how
Section A Demand and Supply
A Walrasian Auction One auctioneer standing in the town hall Audience of 100 buyers or sellers Call out prices and chart the response. Leon Walras 1834-1910
Demand curves as auctions P $100 Would you buy at $100? Would you buy at $60? Total Demand 50 say yes 100 say yes Q
Supply curves as auctions P $100 Would you enter at $70? Industry Supply Would you enter at $100? 60 say yes 100 say yes Q
Supply curves as cost of production P $100 Few firms think they are good enough make a profit with price this low Industry Supply curve $60 More firms think they can make a profit at $100 per unit. More firms enter the market. Q
A is the market equilibrium P A Total Demand Q
Impossible points above demand curve P A Prices all higher than willingness to pay. Q
Impossible points below supply curve P A Prices all lower than willingness to supply. Q
A is the market equilibrium P A Prices make demanders want to buy more, suppliers want to supply more. Q
A is the market equilibrium P A Only A is possible Q
Sometimes governments want something other than point A P C Industry Supply P B B A Total Demand Point B might be a desire to offer low prices to a small group of special people that the government wants to do a favor for. Point C might be a desire to offer high prices and lots of sales to a group of firms that the government wants to do a favor for. Q Point B and Point C are not possible without intervention
What if government insists on P B? P C Industry Supply = Marginal Cost Curve B A P B B Total Demand Q B_Supply Q B_Demand Q Price B offers a price so high that the side would want to supply Q B units. It offers a price so low that demand side would want to buy Q B demand units. If the government tried to conspire to achieve an equilibrium at Price P B there would be shortage. At price P B demand would be to the right of B and we would expect to see B as the new equilibrium. The supply simply cannot happen to the right of the supply curve.
Examples of Price Ceilings Rent control Public college fees Drug price schedules
What if government insists on P C? P P C C C Industry Supply A Total Demand Q C_Demand Q C_Supply Q Price C offers a price so high that the supply side would want to supply Q C Supply units. It offers a price so high that demand side would want to buy Q C demand units. If the government tried to conspire to achieve an equilibrium at Price P C there would be a glut. At price P C demand would be to the left of C and we would expect to see C as the new quantity demanded and purchased while C would mark the amount supplied. The purchased demand simply cannot happen to the right of the demand curve.
Examples of Price Floors Minimum wage laws Note that the economic model clearly implies that there will be fewer employed people in a place with a minimum wage What do you think?
Application to Vaccines Economics says that as the price goes down, more people want to buy that thing and as the price goes up more people want to sell that thing Since vaccines are already free how can these models help us with vaccine policy? Think about transaction costs: Are vaccines really free to the consumer?
Section B Shifting Curves
A voucher (subsidy) can shift up demand P P 2 V A 1 A 2 The voucher means that the consumer has more buying power. Being able to apply the voucher makes everything look less expensive to the consumer so they demand more. The policy makes the new quantity demanded, Q2 higher than Q1 P 1 D 2 D 1 Q 1 Q 2 Q
P Steep demand curves mean vouchers don t work as well. P 2 P 1 V A 1 A 2 A steep demand curve means that quantity doesn t move much when price gets lower so voucher doesn t affect demand as much. People who use vouchers for policy need to know how price responsive demand is. D 2 Q 1 D 1 Q 2 Q
P Advertising can shift up demand and make it less price responsive A 2 P 2 A 1 P 1 D 2 D 1 Advertising just makes people want something more. It can shift up the curve and make people less price responsive. Q 1 Q 2 Q
Psychology Of Advertising What is the value proposition of a health product? Consider the HPV vaccine. What are the goals of someone making this choice? What determines how responsive they will be to advertising?
Rumors Of Danger Can Shift Down Demand Draw what happens if there is a vaccine scare?
Successful Vaccine Programs Can Lower Demand Philipson Effects Rational consumers have demand in proportion to the risk of infection If a disease becomes more rare, demand should decrease If there is lots of herd immunity it is rational to not pay as much or travel as far to get a vaccine The more vaccine programs succeed the more they need to appeal to social pressure rather than direct health benefits.
Why subsidize or advertise? Externalities People might be rational, but without nudging or subsidies they spread too much disease Asymmetric information People just don t know about the value of vaccines Uncertainty People fear unknown things about side effects and safety
Is it possible to spend too much to promote vaccines The fundamental rule of economic efficiency can help MC=MB Marginal cost=marginal benefit Marginal cost of one more dollar spent to promote vaccines = Marginal benefit of disease reduction from preventing vaccine preventable disease Don t spend more than this. Don t spend less.
Summary There are reasons to want to shift demand curves Price floors and price ceilings can change what markets do Advertising, taxing, and subsidizing can shift demand curves The benefits of shifting demand has to be justified by the cost.