Driven by self-interest, consumers will try to pay the lowest prices possible while producers try to sell at the highest price possible. Supply arises from producers’ effort to maximise their profits. Demand arises from consumers’ push to get as much satisfaction as possible (utility maximisation) given their income limits, so it is a reflection of the value that consumers associate with the goods or services. Market forces of supply and demand represent the aggregate influence of self-interested buyers and sellers on prices and quantities of goods and services offered in a market. Demand is the total amount of a good or service that consumers are willing and able to purchase at a given price. Supply is the total amount of a product (good or service) that producers (sellers) are willing and able to sell at a specified price. Therefore, a market includes mechanism for: determining prices and quantities of the traded item, communicating information about prices, and for the distribution of the goods and services. It is a situation where forces of demand and supply interact to determine prices of goods and services being exchanged.
The term market refers to a situation where buyers (consumers) and sellers (producers) interact (directly or through intermediaries) to trade goods and services. For producers of goods and services, being efficient means they produce at the lowest possible average cost.
Efficiency in consumption means that consumers use resources where they get the highest satisfaction level. The term efficiency means that resources are being used where they provide the highest value. For each want met, there are several unmet wants (the trade-offs). Because of the limited earnings, the individual has to prioritise in order to meet the most important wants, or the wants that provide the highest level of satisfaction. For example, a working person earning $200 per week has many wants that might require more than the earnings. Given the limited resources, human beings constantly make decisions that require tradeoffs. Efficiency is central to economic theory because human beings have unlimited wants but limited resources with which to meet those wants. SOME BASIC ECONOMICS CONCEPTS AND DEFINITIONSįor the sake of clarity and simplicity, it is necessary to define some basic economic terms and concepts. Is health care a commodity to be bought and sold for profit, or is it a basic human right that should be accessible to all citizens? It requires an examination of the culture and beliefs of the country about health and health care. It is an issue that requires a closer examination of the philosophy behind the foundation of the health care system in any country.
This issue cannot be easily addressed through economic theory.
#Pure monopoly examples automobile industry free#
3 When the necessary conditions of the ideal free market are not met, there can be market failures some of which are not easily corrected by the market and therefore require interventions from outside the market.Īnother important issue that is also rarely articulated is whether free markets are a desirable feature of a health care system. Markets do fail because necessary conditions for perfect/free markets are rarely met in any industry and least of all in health care. 2Ī market that meets all necessary conditions for efficient resource allocation is an ideal in economic theory, but a rarity in the real world. It is important to explore fully the argument, the assumptions made about the free market, and the conditions necessary for the “invisible hand” to allocate resources efficiently. Unfortunately, this assumption is never articulated explicitly therefore the argument is not fully explored, understood or challenged. 1 The argument further states that without government interference, the “invisible hand” of the market would allocate resources optimally leading to economic efficiency in health care.Īlthough interesting, this argument is based on the assumption that health care meets all necessary conditions for an ideal perfect/free market. It is further argued that government rules and regulations applied in health care markets interfere with proper resource allocation resulting in inefficiency. A common argument heard in health care planning and health policy reform debates is that the government should stay out of health care and let the market allocate resources efficiently.
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