How to Survive Supply and Demand

Succeeding in any economics course (including a course in medical economics) depends on your mastery of the twin concepts of supply and demand. Listen carefully to economic commentators when they are queried on a complex issue in economic theory or policy and their answer is almost always preceded by "It's all because of supply and demand." The introduction of supply and demand into the economics vocabulary is soon followed by adding supply and demand curves to the lexicon. In this hostile environment survival depends on your ability to keep your wits about you while others around you fail. To ensure your success follow these simple rules of survival.

• Use common sense. Most students already know a great deal about supply and demand. The key is to use what you know. Remember economics is a way of thinking. For the most part, it is intuitive. Think about the market for oatmeal. Scientific evidence revealed that consuming large quantities of oatmeal every day reduced the level of cholesterol in the bloodstream and thus the risk of heart attack.* What do you suppose happened to the demand for oatmeal and its price immediately after this information was made public? If you said that demand for oatmeal increased and its price also went up, then you already have some intuitive notion of the workings of supply and demand. Now suppose that farmers decide that higher oat prices warrant expanding the number of acres in oat production. What happens to the supply of oats and its price if farmers double their production capacity? Common sense says that planting more oats increases the supply of oats and prices go down.
• Learn the language. After a few weeks in Econ 101, many students feel like they are taking a foreign language. Mastery of economics requires that you learn the language of economists. When it comes to supply and demand, economists speak in graphs. Understand graphs and you understand supply and demand. If freshman literature were taught in Greek, it would be extremely difficult for the typical student. Not that the subject matter is so hard, it's the language.
• Hone your skills. The rules of graphing are simple. Unlike a foreign language, there are no irregular verbs. But like a foreign language, it takes practice. Practice whenever you can. Economics is not a spectator sport. Watching your professor manipulate graphs is not enough. You have to do it yourself. Remember demand curves are downward-sloping and supply curves are upward-sloping. Economists place price on the vertical axis and quantity on the horizontal axis. Equilibrium price and quantity are determined by the intersection of the supply and demand curves.
• Shift the appropriate curve. The discovery that oatmeal has health benefits affects the market for oats. Does it affect supply or demand or both? Remember what causes shifts in the two curves. For the supply curve to shift, a change in the profitability of making a product available to the market is needed. For the demand curve, it is usually anything that increases the willingness or ability of consumers to buy something. The discovery that oatmeal works like roto-rooter to clean out your arteries will affect the consumers' willingness to buy the product. So the demand curve will shift. Will it shift to the right or to the left? If in doubt at this step, go back to step one. An increase in demand will increase price. The only way to get this result is to shift the demand curve to the right. Shifting the demand curve to the left or shifting the supply curve is counter-intuitive.

It is now time to test your mastery of supply and demand. Consider the market for hospital services. Using a graph, label the axes "Price of hospital services" and "Quantity of hospital services." Draw the supply and demand curves and identify the equilibrium price and quantity of hospital services. Now suppose that due to a nursing shortage, the average salaries paid to nurses increases ten percent. What affect will this increased cost have on the market for hospital services?

* Cynthia M. Ripsin, Joseph M. Keenan, David R. Jacobs, et al., "Oat Products and Lipid Lowering: A Meta-Analysis," Journal of the American Medical Association 267(24), June 24, 1992, 3317-3325.