DEMAND
What Buyers are Willing and Able
to Buy, during a given Time
Period, ceteris paribus.
KEY POINTS ABOUT
DEMAND
“WILLINGNESS AND ABILITY” (not
stridently wanting)
 “BUYERS” (not sellers)
 “during a given time period” is a FLOW
(not a STOCK)
 “ceteris paribus”- all other things are
held constant except price and quantity.
 Whole set of P-Q combinations (not
QUANTITY DEMANDED)

Doctor Remnueration
($thousands/service years)
300
200
160
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Doctor Services (# of doctors/year)
Price
($thousands/organ transplant)
95
60
40
36
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
GENERALIZED DEMAND FUNCTION
f = f( Price:
Taxes,
Price of Complements
Price of Substitutes
Tastes for good/service
Income,
Buyer Expectations,
Number of buyers)
P
Q
Percentage Change
0.4
0.3
Line 1
GDP
Auto Sales
0.2
0.1
0
75
-0.1
-0.2
-0.3
85
95
Percentage Change
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
75
85
95
Oil
Line 2
Auto Sales
Percentage Change
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
75
85
95
Oil
Line 2
Auto Sales
SUPPLY
What Buyers
XXXXX Sellers are Willing and
Able to XXX
buy Sell, during a given Time
Period, ceteris paribus.
KEY POINTS ABOUT
SUPPLY
“WILLINGNESS AND ABILITY” (not
stridently wanting)
XXXXXXXXXXXXXXXXXXX
 “BUYERS”
(not sellers) Sellers (not buyers)

“during a given time period” is a FLOW
(not a STOCK)
 “ceteris paribus”- all other things are
held constant except price and quantity.
 Whole set of P-Q combinations (not
QUANTITY XXXXXXXXXXX
DEMANDED) SUPPLIED

Yearly Remuneration
($thousands/year of service)
300
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
200
160
Doctor Services (# of doctors/year)
Price
($thousands/organ transplant)
95
60
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
36
Organ Transplants (number per year)
GENERALIZED SUPPLY FUNCTION
f = f( Price:
Price of Resources
Technology,
Seller Expectations,
Number of Sellers)
HOW TO BE SHERLOCK HOLMES
IN READING BETWEEN THE LINES
If You Know P and Q then you know whether demand or supply
is involved as well as the direction of the shift.
If You Know the shift in demand or supply, then you know what
is likely to happen to price and quantity
If You Know the determinant that has changed and price,
then you know what is happening to quantity demanded.
If You Know the determinant that has changed and quantity demanded,
then you know what is happening to price.
Lower Price
Lower
Output
Higher Price
Leftward
(downward)
Shift of Demand
Leftward
(upward)
Shift of
Supply
Higher
Output
Rightward
(downward)
Shift of
Supply
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors
Lower Price
Lower
Output
Higher Price
Less productivity (technological change)
Higher price of resources
Seller expectations of future surpluses
Less number of sellers
Leftward
(downward)
Shift of Demand
less income
less tastes for good
less buyers
less complement
lower priuce for substitutes
Buyer expectations about future
shortages
Higher
Output
Rightward
(downward)
Shift of
Supply
Leftward
(upward)
Shift of
Supply
More productivity (technological change)
Lower price of resources
Seller expectations of future shortages
More number of sellers
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors
More income
More tastes for good
More buyers
More complement
Higher priuce for substitutes
Buyer expectations about future
shortages
Price
($thousands/organ transplant)
EQUILIBRIUM
95
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Markets Want to Work

Markets = the process of procuring and
allocating a good

The market can “fail” in that the resulting
allocation of goods is either inadequate
or viewed as inappropriate
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
ADMINISTRATIVE
-PUBLIC GOODS -NATIONALIZATION
COST
MARKET
-PRIVATIZATION
COMPLIANCE
POWER
REGULATION
COST
INEQUITIES
- OUTPUT
EFFICIENCY COST
DYNAMIC
- PRICE
- NEGATIVE EXTER.
MKT. FAIL.
- STANDARDS
-PUBLIC BADS
INDIVISIBILITY ANTITRUST
- MKT POWER
INFORMATION
-STRUCTURE
- INEQUITIES
ASYMMETRY
-CONDUCT
- DYNAMIC
TAXES (SUBSIDIES)
- INDIVISIBILITY
PROVISION OF
- INFORMATION
INFORMATION
RATIONING (MONEY)
Define & Protect Property, Contracts
MARKET POWER: The power of a single
Company to change the price of a good
Or service in the market place.
includes:
MONOPOLY, MONOPOLISTIC
COMPETITION, BILATERAL MONOPOLY.
Examples: Drug Companies while they have
Patents.
Learning, Leadership and Service in the Jesuit Tradition
Slide 3
Market
Power:
the
ability
to
Price
($thousands/organ transplant) Impact market price (or the
95
sales of other firms)
Supply Curve:
Typically through higher
What Sellers are
Prices.
Willing and able
To sell at different prices
40
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
To buy at different
Alternatively through
prices
Lower production
Organ Transplants (number per year)
EXTERNALITIES: impacts on third parties
besides the buyer and seller.
CONSUMPTION EXTERNALITIES: impacts
on third parties as a result of the consumption
of a good. Eg. Each infected person who takes
Drugs eliminates disease helps all of society, not
Just the drug company which provides the medicine
PRODUCTION EXTERNALITIES: impacts
on third parties as a result of the production of
a good. Eg. New discoveries & innovations
impact all of Society, not just the scientist who
disovers them and the firm who employs the
Scientist (streptomyacin patent problem)
Learning, Leadership and Service in the Jesuit Tradition
Slide 2
Price
EXTERNALITIES:
($thousands/organ transplant)
Difference between private and social curves
95
CONSUMPTION
EXTERNALITIES
PRIVATE
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
SOCIAL DEMAND
CURVE
PRIVATE MARKET
40
Equilibrium @ Price=$40,000
PRIVATE
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Price
EXTERNALITIES:
($thousands/organ transplant)
Difference between private and social curves
95
;PRODUCTION
EXTERNALITIES
PRIVATE
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
PRIVATE MARKET
40
Equilibrium @ Price=$40,000
SOCIAL SUPPLY
CURVE
PRIVATE
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Price
EXTERNALITIES:
($thousands/organ transplant)
Difference between private and social curves
95
PRIVATE
SOCIAL DEMAND
Supply Curve:
CURVE
What Sellers are
SOCIAL OPTIMUM
Willing and able
To sell at different prices
PRIVATE MARKET
40
Equilibrium @ Price=$40,000
SOCIAL SUPPLY
CURVE
PRIVATE
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
PUBLIC GOODS: Can’t exclude people from
the enjoyment of the goods after they have
been paid for.
eg. Defense goods, parks, roads, many kinds
of infrastructures
PUBLIC BADS: Can’t prevent people from
being affected by the evils
eg. Terrorism, nuclear disaster, contagion,
Pollution, global warming.
INDIVISIBILITIES: a problem cannot be subdivided into smaller pieces for the purpose of
solving the problem or marketing the solution
Example: even one remaining infected person
means no cure has been achieved. any plan to
wipe out a disease means that a comprehensive
world wide plan must be undertaken.
Learning, Leadership and Service in the Jesuit Tradition
Slide 6
INDIVISIBILITY: Only one good
that cannot be subdivided.
Examples:
The winner’s curse- the
market does not efficiently
allocate an indivisible good to
the best users
Too big to fail
Too big to insures
Price
Winner’s
price too high
($thousands/organ transplant)
95
INDIVISIBILITY:
Only one
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
INFORMATION ASYMMETRY: decision
makers do not have access to the same information
which leads to different definitions, boundaries,
and solutions to problems to be solved and
social outcomes.
Examples: indifference to disease, lack of education
about how to treat diseases, and failure to understand
the tradeoff between private rights and public
goods.
Learning, Leadership and Service in the Jesuit Tradition
Slide 7
SYMMETRIC INFORMATION- everyone
should have equal access to information
so that there is a level playing field in
competition for resources.
Eg. what’s wrong with insider information?
INEQUITIES: any economic, social or political
mechanism that systematically causes one part of
the population to be worse off than another part
of a population through time without the possibility
of correction.
Examples: Poor Populations have greater
vulnerability to TB due to their economic and
social conditions.
Learning, Leadership and Service in the Jesuit Tradition
Slide 4
INCOME DISTRIBUTION:
measured by the Lorenz Curve
100
90
C
u
m
u
l
a
t
i
v
e
80
70
Line of equality
60
50
40
% 30
G
D 20
P
10
0
0
10
20
30
40
50
60
70
80
percentage of population (in order of income)
World GDP
USA GDP
90
100
DYNAMIC MARKET FAILURE: the failure
through time to achieve technological change
and the failure of the market to achieve stable,
equilibrium outcomes.
Examples: As a disease disappears in a given
locale:
-lack of incentives for new drug development
-Lack of treatment for those who are diseased
both in the area and in other areas where
pandemics may occur
Learning, Leadership and Service in the Jesuit Tradition
Slide 5
Price
COBWEB MODEL
The cycle repeats, but, if left untouched, it
results now in the total destruction of the
market. No output at all!!!
Ao
x
B1
B2
B3
CHEMICALS (millions of pounds/year)
SUMMARY OF MARKET FAILURES
MARKET POWER- ability to affect market price
EXTERNALITIES- third party effects
(beyond buyer & seller)
PUBLIC GOODS, BADS- can’t exclude others
INDIVISIBILITY- cannot subdivide good
INFORMATION ASYMMETRY- unequal access
to information
INEQUITY- unequal opportunity
DYNAMIC MARKET FAILURE- unstable
equilibrium through time
MARKET
FAILURE
Tuberculosis
Example
EXTERNALITY
-PUBLIC GOODS
MARKET
POWER
INEQUITIES
DYNAMIC
MKT. FAIL.
INDIVISIBILITY
INFORMATION
ASYMMETRY
Third party: healthy population
TB tests, Drugs, Hospitals, Ventilation Systems
Drug Companies, Patents
Poor Populations have greater vulnerability
Lack of incentives for new drug development
As disease becomes less threatening
Even one infected person means no cure
Indifference, lack of education, personal vs.
public good.
Learning, Leadership and Service in the Jesuit Tradition
Slide 8
Public Enterprise: The government provides the
Service instead of the market.
• Nationalization: Government takes over private
enterprises
Examples: Move to single payor system
•Privatization: Government sells off government
enterprises to the private market
Examples: Sell off Veterans Administration
Hospitals
Learning, Leadership and Service in the Jesuit Tradition
Slide 9
REGULATION: Government determines how
Market outcomes are to be limited.
*output regulation: Government sets quotas or
Limits the amount of output that can be provided
By participants in a market.
Examples: prohibition of bogus cures
*price regulation: Government sets price controls
Either as minimum or maximum prices that can
Be charged in a market.
Examples: price controls on drugs
*standards regulation: Government sets limits on
The characteristics of a product or service
Examples: FDA regulations on advertising & quality
Learning, Leadership and Service in the Jesuit Tradition
Slide 10
ANTITRUST: the government limits the structure
and conduct of firms in the market instead of
market performance such as output and price.
• Structure: Government examines all mergers
Examples: Hospital, drug co. mergers
•Conduct: Government limits conspiracies to fix
prices
Examples: Drug company pricing
Learning, Leadership and Service in the Jesuit Tradition
Slide 11
Subsidies: Government provides money to
provide incentives for certain market outcomes
Examples: Medicare, Medicaid, Free Drugs
(Isoniazid, Myambutol)
Taxes: Government collects money to provide
revenues for government services and to
discourage certain market outcomes.
Examples: Income Taxes
Learning, Leadership and Service in the Jesuit Tradition
Slide 12
PROVISION OF INFORMATION: Government
provides information that the market otherwise
Would not provide
Examples: Data on extent of TB
RATIONING: Government determines market
Signals that will determine how distribution of
goods or services is to occur
Examples: TB drugs and treatment
Learning, Leadership and Service in the Jesuit Tradition
Slide 13
GOVERNMENT TUBERCULOSIS
INTERVENTION
EXAMPLE
PUBLIC ENTERPRISE
-NATIONALIZATION
-PRIVATIZATION
REGULATION
- OUTPUT
- PRICE
- STANDARDS
ANTITRUST
-STRUCTURE
-CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
INFORMATION
RATIONING
SINGLE PAYOR SYSTEM
SELL OFF VA HOSPITALS
ISOLATION, QUARANTINE
PROHIBITION OF BOGUS CURES
PRICE CONTROLS ON DRUGS
FDA Regulations on Advertising, Quality
HOSPITAL, DRUG CO. MERGERS
PRICE FIXING,
MEDICARE, MEDICAID,FREE DRUGS
(ISONIAZID, MYAMBUTOL)
PUBLIC HEALTH INFORMATION,
DATA ON EXTENT OF TB
Learning, Leadership and Service in the Jesuit Tradition
Slide 14
GOVERNMENT TUBERCULOSIS
FAILURE
EXAMPLE?
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
*How much it costs the government to
Intervene.
*How much it costs the private sector
To comply with government intervention
*How much is lost in efficiency of service
As a result of government intervention
Learning, Leadership and Service in the Jesuit Tradition
Slide 15
GOVERNMENT FAILURE
FAILURE to define and enforce property rights, property
transference, and contracts
ADMINISTRATIVE COST
COMPLIANCE COST
EFFICIENCY COST
-ANDAll of the Market Failures as well!!!
NEGATIVE EXTER.
PUBLIC BADS
MKT POWER
INEQUITIES
DYNAMIC
INDIVISIBILITY
INFORMATION
ASYMETRY
Learning, Leadership and Service in the Jesuit Tradition
Slide 16
GOVERNMENT STUDIES
Type of
Study
Objective of Study Definition and
Focus
Cost Benefit
Analysis
Net Social Benefit
Regulatory Impact
Analysis
Net Social Benefit
& other social
objectives
Economic Impact
Analysis
Describe all
regulatoryt impacts
Closure Analysis
Maximize
regulatory
objective
Cost Effectiveness
Analysis
Maximize pollution Avoids $ value on
abatement, etc.
benefits of
government
intervention
Up to decision
Focuses only on
makers
govt. unit
Fiscal Impact
Analysis
Implicit
Constraints
Benefits & costs
None
included to
whomever
occurring
Includes cost
Environmental &
benefit analysis and other constraints
other studies
Examines price,
output, financial, &
employment
impacts
Defines degree of
regulation that will
shut firms down
Assumes impacts
should be minimal
Implicitly, firms
are not to be shut
down
Budget or cost
constraint limits
amount of
intervention
Govt. revnue must
exceed cost
Problem
________
Comprehensive
measurement of
benefits & costs is
hard
Goes beyond costbenefit, but
becomes very
subjective
Regulation
discouraged.
Limited weighing
of costs/benefits
Overregulates
profitable,
underregulates
unprofitable
Comparisons
difficult across
different types of
intervention
Ignores costws &
benefits to society
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES - OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION -STRUCTURE
ASYMMETRY -CONDUCT
TAXES (SUBSIDIES)
PROVISION OF
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COS
- NEGATIVE EXTER.
-PUBLIC BADS
- MKT POWER
- INEQUITIES
- DYNAMIC
- INDIVISIBILITY
- INFORMATION
(E)
(F)
Current Price
P
Supply
Demand
(G)
Current Price
P
Demand
Supply
(H)
Current Price
P
P
Demand
Supply
Minimum
Output
Quota
Current Price
Demand
Supply
Minimum
Price
Control
Maximum
Output
Control
Maximum
Price
Control
Aggregate Income
Aggregate Income
Aggregate Income
Aggregate Income
Expansion of Organ Transplants
1988
1998
Number of organ transplants
each year
Number of centers performing
12,618
20,961
66%
235
278
18%
Number of patients waiting
14,000
66,000
370%
5,906
9.913
68%
Number of donors
% increase
Health Resources and Services Administration (HSRA) of the U.S. Department of Health and human
Services, “Impproving the Nation’s organ transplantation system, p. 1
Conclusion: 5000 patients die each year
Government Intervention
Procurement Slows
Year
 1981 to
 1986

Cadavers
2142
3990
– Annual Growth Rate Prior to
Regulation 14.4%

1987* to

1999
4000
5849
– Annual Growth Rate Since
Regulation 3.7%
% Change in Organ Transplants per
year
18
16
14
12
10
8
6
4
2
0
Market Failure





Early Transplant Success Created a “Gold
Rush” mind set.
Limited pool of cadavers encouraged
competition and the development of “God
Squad” allocation of the limited pool of
organs
Inequities of who gets organs
No control over diseased organs
Distasteful cadaver mongering (international)
Price
($thousands/organ transplant)
95
Surplus @ Price= $60,000
60
40
36
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
Shortage @ Price = $36,000
To buy at different
prices
Organ Transplants (number per year)
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplie
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Price
Quantity demanded exceeds quantity supplied
($thousands/organ transplant)
Black market prices exceed legal prices
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplied
($thousands/organ transplant) Black market prices exceed legal prices
95
Lines of people with first-come-first-served
rationing
Price
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Government Failure
NOTA (1984/1986) is passed and the present system of
procurement and allocation developed
» People cannot sell their own organs (there is a
price ceiling of zero which maximizes a shortage).
» Procurement organizations can sell the organs but
recovery is limited by the rules of procurement
» The rules of allocation encourage people to be put
onto waiting lists. Rationing is based on “waiting
time”… But “medical need” could be worse- lower
success rate
» “Regionalization” or other bootstrap solutions will
not fix what is fundamentally an incentives problem
Price
Quantity supplied exceeds quantity demanded
($thousands/organ transplant)
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Price
($thousands/organ transplant)
Black market prices below legal prices
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Black market prices below legal prices
($thousands/organ transplant)
Lines of product (inventories) can’t be sold and
95
Supply are dumped.
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
($thousands/organ transplant) Black market prices below legal prices
Lines of product (inventories) can’t be sold and
95
are dumped.
Supply
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)