pricing system factors affecting pricing system equilibrium elasticity of demand and supply

1. Pricing system, elasticity and
equilibrium of demand and supply
Heera KC
Lecturer
MSc. Nursing(Midwifery)

2. Price Determination
• Economics analyses markets mainly through what is called price theory.
• A market brings together the demand for goods from consumers and the
supply of those goods from suppliers.
• Consumers and suppliers base their buying and selling on the price that
they have to pay or will receive.
• Price therefore acts as a signal to both groups as to what they should do
in the market.

3. • Pricing: it is the manual or automatic process of applying prices
to purchase and sales order. The effective price is the price the
company receives after accounting for discount, promotions and
incentives.
• Reserve price: When the price of goods falls extensively, then
there will be no supply at all. The supplier doesnot supply the
goods below some price.

4. W hat factors determine the price and quantity
of health care?
1. The prices can be high because demand is high.
2. High prices because of limited supply.
3. Government policy: Gonernment has a significant influence
on prices.
4. Prices may be determined by bargaining between hospitals and
drug companies rather than by supply and demand.
5. Productivity of goods and Changing weather of production
of goods
6. Consumers behaviour: limited income

6. • Illustration of above example
if the demand curve is further to the right in the United States
compared to
• Europe (part [a] of Figure 1 ), this implies—all else being equal—
higher prices in the United States. If the supply curve in the United
States lies further to the left than the supply curve in Europe part
[b] of Figure 1 , then this also would imply—all else being equal—
higher prices for health care in the United States.

7. Equilibrium of supply and demand
• Market equilibrium occurs when two economic variables [supply
and demand] are in balance.
• The market equilibrium comes at that price and quantity where
supply and demand forces are in balance.
• At such a price, the quantity and amount that buyers wish to buy is
just equal to the amount that sellers wish to sell.

8. Cont...
At the equilibrium, price and quantity tend to stay same as long
as other things remain equal.
• Equilibrium price and quantity come at that level where the
amount willingly supplied equals the amount willingly
demanded.
• In a competitive market, this equilibrium is found at the
intersection of supply and demand curves.
• No shortages or no surplus are found at equilibrium price.

10. Elasticity
• In economics, elasticity refers to the ratio of the relative change
in a dependent variable to the relative change in an
independent variable.
• A change in any of the demand factors will cause a change in
quantity purchased of a good per time period.
• Elasticity in economics refer to the response in demand or
supply in changes or response to price.

11. • High income elasticity suggests that when a consumer’s
income rises, consumers will purchase much more of that good.
• Negative income elasticity means that the good is inferior, and
an increase/decrease in income would decrease/increase the
demand for that good.
• Positive income elasticity means the good is normal, and an
increase/decrease in income would increase/decrease the
demand for that good.

12. Elasticity of demand in heath care
• Elastic demand :Small change in price may lead to a big change
in demand.
Demand may be affected by factors determined by the consumer,
the provider, the supply or location of services.
• Elasticity of demand relates quantity demanded to the price of the
goods or services.
• Cost to the consumer is a factor in choosing to purchase goods or
services.

15. Factors affecting elasticity of demand
• Price change
• Availability & price of substitutes
• Availability & price of complements
• Income change
• Nature of commodity
• Multiple uses of commodities
• Deferred consumption(saving)
• Position of the commodity in consumers budget

16. Inelasticity of demand
• A big change in price is followed by small change in demand.
Elasticity of supply: Degree of extension or reduction of
quantity of goods supplied at the given change in price.

17. Estimating Demand for Medical Care
• Quantity demanded will be affected by:
– out-of-pocket price
– real income
– time costs
– prices of substitutes and complements
– tastes and preferences
– state of health
– quality of care

18. Externalities in demand/supply analysis
• In economics, an externality is defined as an
indirect consequence of production or
consumption that affects not the producer or
consumer but a third party — society as a whole
or some sub-population.

19. • Because the costs and benefits of externalities are not included
in the price of the product, externalities have the potential to
distort markets, where prices are theorized to reflect the ―real‖
value.
• Positive externalities bring benefits to the third party; negative
externalities impose costs. Below are some examples of
positive and negative externalities.

20. Positive Corporate Externalities
• A workplace vaccination program reduces absenteeism for the
company but also benefits society as a whole by slowing spread of
infectious diseases.
• Insurance discounts for those who complete driver education
programs can reduce payouts for company, costs and accidents for
drivers, and motor vehicle injury rate for society.
• Voluntary installation of pollution control systems can win a
manufacturer a tax break, benefit nearby residents by lowering
pollution and benefit society as a whole by lowering pollution-
related costs.

21. Negative Corporate Externalities
• Air pollution from industrial manufacturing contributes to respiratory and
cardiovascular diseases and cancer, agricultural damage and climate change.
• Tobacco use leads to increased hospitalizations and lost productivity, the costs
of which are borne by tax payers and government.
• Industrial production of meat led to farms that were easier to run, with fewer
and often less-skilled employees, and a greater output of uniform animal
products.
• Social costs include contributing to the increase in the pool of antibiotic-
resistant bacteria because of the overuse of antibiotics; air quality problems;
the contamination of rivers, streams, and coastal waters with concentrated
animal waste; animal welfare problems, mainly as a result of the extremely
close quarters in which the animals are housed.