The healthcare law that was enacted this spring by the U.S. President Barrack Obama aimed at providing U.S citizens with medical cover. The law established universal medical services to all U.S. citizens and to be paid for by the federal government. The enactment of the law ends the need for private medical insurance in the country that will now provide supplementary medical coverage.
The government would fund the national healthcare through taxation and other funds that would replace the health insurance premiums that were initially paid by the citizens. This paper examines the application of economic concepts such as law of demand supply, equilibrium and managerial decisions on this healthcare law.
Every organization aims at maximizing the profit made by the organization. In order to maximize profits, the organization needs to minimize costs. According to Png and Lehman, the management of an organization has a duty to formulate policies and make decisions that would lead to the achievement of the set goals (36).
Given that the business environment is dynamic, firm mangers usually rely on strategic decision making that involves making of decisions based on the strategies that would maximize the use of firm resources.
Some of the strategic decisions made by an organization include decisions on cost minimization and effective utilization of firm resources. In order to minimize costs, the management ensures that the operational processes are efficient, cheap quality inputs are utilized efficiently while creating valuable products that satisfy consumer needs.
Basing on the managerial decision-making, the federal government is similar to the management of organizations. It needs to ensure that all healthcare needs of U.S citizens are satisfied. Therefore, it sought to satisfy the healthcare needs by establishing the national healthcare act that would be funded through taxation. This decision to enact the act is optimal because the federal government would establish a healthy nation that would contribute to economic growth positively through increased production.
Demand, supply and market equilibrium
According to Png and Lehman, both buyers and sellers meet in a market in which there is the exchange of goods and services (121). Economic resources are usually in short supply while the needs that are to be fulfilled using the resources are usually indefinite. In addition, different people and regions are bestowed with different resources that satisfy different human needs.
Due to different endowment of resources to countries and regions, some countries have a comparative advantage in the production of a given good or service over others. In addition, the differences in resources endowment have made countries and individuals within the country to be dependent on external economies hence; they would always demand the supply of given goods and services for the fulfillment of their needs.
The law of demand posits that the demands for goods and services shrink as the prices of the goods/services increases while other things are held steady. Demand is provided in terms of quantity of the goods. The quantities of goods that are demanded by clients differ from one individual to another basing on various factors that affect demand.
Fluctuations in the quantity of a given good/service that is required by consumers fluctuates over time based various factors such as the level of proceeds for consumers, the price of the good and availability of substitutes among other factors.
The supply of goods and services occurs in the market too. Suppliers provide goods based on the quantity of the goods that consumers require in order to meet their needs. The quantity of goods/services supplied is a function of many factors including the price of the good/service, level of income for consumers, productivity and the amount of goods/services that consumers need in order to meet their needs.
The law of supply postulates that the supply of a given good/service declines as the price of the good/service decreases and vice versa with other factors being held steady (Png and Lehman 357).
Equilibrium in the market is obtained at the level in which the total of goods/services demanded by clients equates the level of goods/services supplied by different sellers in the same market.
At equilibrium, the price at which the sellers sell their products to customers is referred to as the equilibrium price while the equilibrium quantity is the quantity supplied by sellers and bought by clients in the market. At equilibrium, there is no incentive for the suppliers to increase the goods supplied because the price and income remains the same in the short term.
Similarly, customers have no incentive to increase the amount of goods demanded in the short term. The changes in other factors in the business environment can cause the amount of goods/services supplied and demanded in the market to change. Some of the factors include changes in demographics, income and productivity among other factors (Png and Lehman 123).
The economic concepts of demand and supply could also be applied to the healthcare act. The customers in include all U.S. citizens that needs medical care. The supplier is the government. The level of demand would increase if the U.S. population increased or the levels of epidemic or accidents in the country increased. The equilibrium in the provision healthcare services to the citizens would be achieved whenever the supplied services would be equal to the demanded services.
According to Png and Lehman, an optimizing firm should keep producing as long as the marginal costs incurred during production are less than the marginal revenue (183). During the production period, the company should always focus on minimizing processing costs to ensure that it meets its profit maximization objective. An organization should produce until the level in which the magical costs realized in the course of production are equal to the marginal revenue.
This is the optimal position of the firm. Any increase in production would result in losses. The management of an organization can alter this position if long-term production capacity is created. This can only happen in new management tools such as investment in new technologies and expansion of production space and plant.
The application of optimal techniques to the healthcare law would mean that the federal government should increase the provision of healthcare services as long as the marginal costs incurred in healthcare service provision is less than the marginal tax collected by the government.
The optimal level of healthcare service provision would be when the marginal cost of the services is equal to the marginal tax collected. New decisions to use advanced technology and increase healthcare services provision capacity should sought once the government increases service provision at the expense of healthcare costs.
Consumer behavior and rational choice
Organizations are involved in the production of goods and services while consumers are mainly to make consumption decisions for the produced goods. The theory of demand postulates that consumers demand goods (services) in order to meet their unlimited wants. After the goods/services are provided, the consumers consume them for satisfaction that is measured in terms of utility.
Consumers are rational in their consumption decisions because they always choose the best basket of supplied goods that would best meet their needs given the prevailing circumstances. They therefore decide the quantity of goods to purchase and the amount of money to spend on the goods. Given the rationality of consumers, the healthcare service consumers in the U.S., the U.S citizens are rational consumers too.
They would make decisions on the type of healthcare services demanded. However, the amount of money to spend on the services would not be made by the citizens, but by the federal government through taxation.
Demand functions indicate the existing relationship between the levels of the good demanded and the determinants of the levels demanded by the customer. The quantity of a given good demanded by consumers is determined by various factors such as the price of the good, the level of income, the prices of other related goods such as compliments and substitutes and tastes and preferences. Given these factors, the demand function of a given good can be expressed as indicated below.
D=f(P,I,PXPYT) where D- quantity demanded, P- price of the good demanded, I- Income, PX– price of related good x, PY– Price related good y and T- tastes and preferences.
Application of demand functions in the healthcare law
The demand function could also be applied to the healthcare law and the demand of healthcare in the U.S. The U.S. citizens are the consumers of healthcare services provided by the federal government under the healthcare law.
The demand of healthcare services in the U.S is determined by various factors such as exposure to risk factors, levels of income, price of healthcare among other factor. The healthcare demand function can be expressed as below.
H=f(R,I,P, O) where H- healthcare quantity demanded, R-exposure to risk factors, I-levels of Income, P-charge son the healthcare and O-other factors
An increase in any of the causative factors could alter the level of healthcare services demanded by the U.S. citizens. For instance, an increase in the number of people exposed to risky environments that could affect negatively their health could increase the demand of healthcare services. An increase in healthcare taxation could reduce the demand for healthcare services because many people would opt for private services. This is similar to an increase in income for U.S citizens.
Production of goods and services entails utilization of various resource inputs such as labor, power, and raw materials among other factors. The theory of production involves the determination of the levels of input factors to be used by an organization to produce a given level of out.
An organization would combine different levels of factors of inputs such as labor and capital to produce a given output. However, in the course of productivity, organizations aim at minimizing the costs incurred while ensuring that the profit realized are maximum. A firm can experience increasing returns to scale if the marginal costs incurred reduce as the produced output increases.
Constant returns to scale are experienced whenever the marginal cost realized by the organization is constant as the output produced increases. On the contrary, decreasing returns to scale would be realized if the marginal costs of an organization incurred during productivity would increase as output increases.
Therefore, it is advisable that the management of the organization should produce up to that level in which the marginal cost equals the marginal revenue in order to avoid reduction in scale of returns that could lead to an exit from the market (Png and Lehman 319).
The application of the theory of production to the healthcare law implies that the government provides healthcare services using capital and labor. Capital used in the productivity of the services includes the buildings, latest technological equipment in public hospital vehicles among other capital tools.
Labor on the other hand includes all healthcare professionals employed by the state to provide quality healthcare to U.S. nationals. The cost incurred in the provision of healthcare services includes the cost of capital and labor while the revenue is obtained from healthcare taxation. Increasing returns would be realized whenever the marginal cost of providing healthcare services decreases as service provision increases.
On the contrary, the federal government would realize reducing returns to scale whenever the marginal costs incurred by the state in providing healthcare services increases as provision of healthcare services increases. The optimal healthcare service output would be at the position in which the level of marginal cost of healthcare service provision equals marginal revenue from taxes (Png and Lehman 170).
The federal government in the healthcare sector in the long run should pursue technological change and industrial revolution. This would enable the federal government increase and improve the provision of healthcare services to U.S. citizens. However, the federal government can pursue technological change if it realizes that it is providing healthcare services under decreasing returns to scale. This change of strategy would ensure that the government minimizes costs while maximizing healthcare tax revenue.
Png, Ivan and Lehman, Dale. Managerial Economic. New York: Willey-BlackWell. 2007.