Supply of health and medical care

Al-Quds University
Faculty of Medicine
Health Economics
March, 2017

Supply of Health
and Medical Care

Outline
 Definition and Law of Supply.
The health care production function.
 Cost production in health care.
Factors determine price and quantity of health care.
Factors affecting Supply.
Investment on healthcare.
Health insurance and supply in healthcare.
Market Equilibrium.
Questions.

Nature of the supply
Supply defined as :
The total amount of a product (good
or service) available for purchase at
any specified price in specific time
period.

Nature of the supply
Suppliers include hospitals, which
provide health care directly, and
medical equipment and
pharmaceutical companies, which
provide inputs to the healthcare
production process.

 Supply curve : A graph showing the relationship
between the quantity supplied of a good and its
price when all other variables are unchanged.

 The supply provided by producers will
rise if the price rises because all firms
look to maximize profits .

What is the 'Law Of Supply'
 Supply is the microeconomic law that states that,
all other factors being equal, as the price of a good
or service increases, the quantity of goods or
services that suppliers offer will increase, and vice
versa.
 suppliers will attempt to maximize their profits by
increasing the quantity offered for sale.

 The supply curve slopes upward and to the right,
rising from southwest to northeast.
 In contrast, the demand curve slopes downward.

 The chart below depicts the law of supply using a
supply curve, which is always upward sloping.



Each point on the curve
reflects a direct
correlation between
quantity supplied (Q)
and price (P).

 for example, that physicians would be willing to offer
ten office visits if the price were $90 per visit. At a
higher price, say $100, more visits would be offered

The healthcare production function

 A health production function describes the relationship
between combination of health inputs, both medical and
non-medical, and resulting health output.
 It shows how health inputs interact to produce a particular
level of health, and how health status changes if health
inputs used and their combination change.

 Typically we classify inputs into two categories
- Capital
-Labor

Cost production in health care
There must be costs for health care services to be
produced, and these costs include effort, material,
resources, time and utilities consumed, risks incurred,
and opportunity forgone in production.

Short Run Cost
 Cost theory on the production theory of the medical firm
identifies how total costs respond to changes in output.
 If we assume that the two inputs of personnel hours, n, and
capital, k “fixed”, the short run total costs, STC, of producing a
given level of medical output, q, can be written as:
STC(q) = wn + rk
where w and r represent the wage for personnel and the rental or
opportunity costs of capital, respectively.
 The equation above implies that the short run total costs of
production are dependent on the quantities and prices of inputs
employed.

Factors Affecting the Position of the Short Run
Cost Curve
A variety of short run circumstances affect the position of
the total cost curve (up or down) among them are:
 The prices of variable inputs.
 The quality of care.
 The patient case-mix .
 The amounts of the fixed inputs.

Marginal cost and Marginal benefit
in health care
 Marginal cost: is the incremental increase in a health firm's
input costs to produce one additional unit of output. For
example, to increase the capacity of a hospital for sites to sleep in
it requires a cost to build a new rooms in the hospital that is the
marginal cost.
 Marginal benefit: is the incremental increase in a benefit to a
consumer caused by the consumption of an additional unit of
good. Marginal benefits normally decline as a consumer decides
to consume more and more of a single health service.

Marginal cost and Marginal benefit

Suppose we want to explain
- “Why is the price of health care higher in the
United States than in Europe?”

Supply and Demand offer two
possible answers
The prices can be high because demand is high.
The prices can be high because the supply is limited.

What factors determine the price
and quantity of health care?

Supply side
 The supply side is problematic. First of all, some
health-care suppliers have significant market
power.
 So it is trickier to compare the price of health care
across countries because we have to consider
differences in market power as well.
 A bigger problem is that some health-care
suppliers, such as hospitals, are either government-
controlled or not-for-profit institutions.

Government and prices
 Health-care prices are not necessarily determined by
supply and demand.
 The government has a significant influence on prices:
for example, the governments in some countries set
prices for pharmaceutical products.
 Prices may be determined by bargaining between
hospitals and drug companies rather than by supply
and demand.

Factors affecting supply include :
 Exogenous determinants of supply; in other words, factors
that are held constant underlying the supply curve.
 Endogenous determinants of supply ; Price .

Prices of production-related goods

Taxation and Support of government

Supply curve shifts towards right
 Decrease in price of other goods.
 Decrease in price of factors of production (inputs).
 Advanced and improved technology.
 Favorable taxation policy (decrease in taxes).
 Increase in number of firms.
 Expectation of fall in prices in future.
 Improvement in means of transport and communication.

Supply curve shifts towards left
 Increase in price of other goods
 Increase in price of factors of production (inputs)
 Complex and out-dated technology.
 Unfavorable taxation policy (increase in taxes).
 Decrease in number of firms.
 Expectation of rise in prices in future.
 Poor means of transport and communication.

 The healthcare sector is
made up of many different
industries – from pharmaceuticals
and devices to hospitals –
 Investing in healthcare stocks can provide generous
returns, but it is also tedious due to the many factors
affecting stock prices.
 Investments in this sector are affected by many
variables, including positive trends and negative
trends.

Positive trends include:
 the aging population.
 people living longer with chronic disease.
 obesity and diabetes epidemics.
 technological advances.
 the global reach of disease.
 personalized medicine(separates patients into different groups,
with medical decisions, practices.. etc).

Negative trends include:
 a single-payer system
 the uninsured
 cost controls
 consumerism

‫يف‬ ‫الصحة‬ ‫على‬ ‫اإلنفاق‬‫فلسطني‬
‫المحل‬ ‫الناتج‬ ‫من‬ ‫الصحة‬ ‫على‬ ‫اإلنفاق‬ ‫نسبة‬ ‫بلغت‬‫ي‬
‫فلسطين‬ ‫في‬ ‫اإلجمالي‬10.9%‫العام‬ ‫خالل‬2013.
‫سجل‬‫خال‬ ‫الصحة‬ ‫على‬ ‫الجارية‬ ‫النفقات‬ ‫قيمة‬ ‫مجموع‬‫ل‬
‫العام‬2013‫حوالي‬1.347‫أمريكي‬ ‫دوالر‬ ‫مليار‬.

In Palestine
 The total rate of doctors (20 doctors per 10,000 people) of
the population, as dentists rate (5.2 doctors per 10,000
people) of the population, and the rate of Pharmacy
(10 pharmacists per 10,000) in 2010
 The total number of hospital beds (including psychiatric
hospitals and neurological) (5,108) beds, at a rate of (793)
people per bed, including the family of East Jerusalem
hospitals, (751) people per bed in the Gaza Strip, and (828)
people per bed in the West Bank. In 2010
 Life expectancy at birth 80.7 years in 2010

In the United States
 There are fewer physicians per person than in most other
OECD countries. In 2010, for instance, the U.S. had 24
practicing physicians per 10,000 people.
 The number of hospital beds in the U.S. was 2.6 per
1,000 population in 2009, lower than the OECD average
of 3.4 beds.
 Life expectancy at birth 78.7 years in 2010, more than one
year below the average of 79.8 years.

The size of the supply response differs across types
of services,
 While the expansion of health insurance coverage :
 Did not increase the numbers of clinics and nurses.
 The number of beds increased.
 No significant increase in hospitals.
 The total supply of physicians and nurses was limited by
the capacity of medical and nursing schools.

 Effect only on the number of beds! Why?
because it is less costly for existing hospitals to add
beds than for new hospitals .

 Also, the total supply of physicians and nurses was
limited by the capacity of medical and nursing
schools.
 it takes years to be a typical specialist, physician,
practitioner !

Market Equilibrium
 Demand and supply intersect with one another to
establish market equilibrium.
 A situation where the price in a given market is such
that the quantity demanded is equal to the quantity
supplied.

Excess Supply or Surplus
 Excess Supply
At a given price, the excess of quantity
supplied over quantity demanded.
 Price of the good will fall as sellers compete
with each other to sell more of the good than
buyers want.

Excess Demand or Shortage
 Excess demand
At a given price, the excess of quantity
demanded over quantity supplied.
 Price of the good will rise as buyers compete
with each other to get more of the good than is
available

Changes in Equilibrium
Situation
Increase in
Demand
No Change in
Demand
Decrease in
Demand
Increase in Supply Price  ?
Quantity 
Increase
Price Decrease
Quantity
Increase
Price  Decrease
Quantity  ?
No change in
Supply
Price  Increase
Quantity 
Increase
Price  No Change
Quantity  No
Change
Price  Decrease
Quantity 
Decrease
Decrease in Supply Price  Increase
Quantity  ?
Price Increase
Quantity
Decrease
Price ?
Quantity 
Decrease

References
 Essential of health economics by Diane M. Dewar.
 Introduction to Health Economics by Gashaw Andargie.
 Health Economics for Developing Countries: A Survival Kit.
 The economics of health care an introductory text by Alistair McGuire, John
Henderson and Gavin Mooney.
 Effect on Supply Curve due to Changes in Other Factors by Smirit chand.
 Theory and Applications of Economics.
 Introduction to Health Economics by David Wonderling, Reinhold
Gruen&Nick Black.
 www.who.int
 ‫الفلسطيني‬ ‫المركزي‬ ‫االحصاء‬ ‫جهاز‬2013
 www.oecd.org/
 ww.businessdictionary.com/definition/supply.htm
 http://www.freeeconhelp.com/2011/10/why-marginal-benefit-equals-
marginal.html
 http://www.investopedia.com/

Q1: Define Supply ?
 The total amount of a product (good or service)
available for purchase at any specified price in
specific time period.

Q2: The slope of Supply curve is
A) Zero
B) Positive
C) Negative
D) more than one answer
The Answer is : Positive ( B )

Q3:The Supply Curve is upward-
sloping because
A) As the price increases, so do costs.
B) As the price increases, consumers demand less.
C) As the price increases, suppliers can earn higher
levels of profit or justify higher marginal costs to
produce more.
D) None of the Above
The Answer is ( C)

Q4: All of the following shift the
curve of supply to Right except ?
A. Decrease in taxes
B. Advanced and improved technology.
C. Increase in number of firms.
D. Increase in price of factors of production
E. Expectation of fall in prices in future.
 The Answer is ( D )

Q5: All statements below are true, except ?
 A. Supply is part of microeconomic branch.
 B. In shortage, the quantity supplied is more than the
quantity demand.
 C. Inputs of healthcare can classify into two categories ,
capital and labor.
 D. positive trends of investment in healthcare include
chronic diseases.
The Answer is ( B )

Q6 : All of the following are consider as a part of
Macroeconomic, except ?
 A. National output.
 B. Unemployment.
 C. Individual prices and quantities.
 D. Foreign trade.
 E. Overall price level.
The Answer is ( C )

Q7: The supply side is problematic in healthcare
because ?
 A. Prices may be determined by bargaining between hospitals
and drug companies.
 B. some health-care suppliers have significant market power.
 C. some health-care suppliers are government-controlled.
 D. some health-care suppliers are not-for-profit institutions.
 E. All of them.
The Answer is ( E ).

Q8: In excess demand the price will
………… to reach equilibrium point ?
A. Fall.
B. Rise.
C. Stay the same.
D. Depend on other factors !
The Answer is ( B)

Q9: If there is a decrease in demand
and increase in supply, the quantity in
the new equilibrium is ?
A. With this information , more than one answer !
B. Rise.
C. Stay the same .
D. Fall.
The answer is ( A ).

Q10: In this figure , which point at horizontal
axis the MB < MC ?
A. Q1
B. Q*
C. Q2
D. Q1 + Q2
The Answer is (Q1)

Supply of health and medical care

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