Question

Assume that you are analyzing the hospital services market. *For scenarios a-c, explain whether each of the following result in a change in demand, change in quantity demanded, change in supply, or change in quantity supplied in the hospital services market. Draw and label a positively sloped supply curve and negatively sloped demand curve in your diagram to depict each scenario. .

A. A surplus of nurses results in a decrease in the average wage paid to nurses. Note: Nurses are an input in the production of hospital services.

b.Insurers place an increased emphasis on increasing the number of same day surgeries and reducing the number of hospital stays for the insurance pool by reducing reimbursements related to hospital stays.

c.Widespread hospital mergers occur, resulting in the closure of some small hospitals and a lack of entry by new hospitals.

Answer 1

In all graphs, D1 and S1 are initial demand and supply curves intersecting at point A with initial equilibrium price P1 and quantity Q1.

(a)

Lower wage rate will decrease input cost, which will increase production, thus increasing supply and shifting supply curve rightward, decreasing price and increasing quantity.

In following graph, S1 shifts right to S2, intersecting D1 at point B with lower price P2 and higher quantity Q2.

(b)

Decrease in reimbursements will increase the effective price paid by hospital service users, which will decrease demand for hospital services and shift demand curve leftward, decreasing both price and quantity.

In following graph, D1 shifts left to D2, intersecting S1 at point B with lower price P2 and lower quantity Q2.

(c)

Closure of existing hospitals and lack of new hospitals will decrease market supply of hospital services, shifting supply curve leftward, increasing price and decreasing quantity.

In following graph, S1 shifts left to S2, intersecting D1 at point B with higher price P2 and lower quantity Q2.