DEMAND

To the economist, demand means the quantity of a good or service that individuals can buy at every possible price. Demand then defines a relationship between the price of a commodity and the number of units the buyer is willing to purchase. It implies that consumers both want the product and can pay for it. The resulting law of demand states that “as the price of any good decreases, the quantity of that good that consumers are willing and able to purchase will increase. As price increases, consumers will demand a smaller quantity of the good.” This is an inverse relationship: the other gets smaller as one factor increases. Evidence of this law can be seen by looking at everyday buying habits. Clothing stores lower the price at the end of the season to clear their racks of goods. Unscrupulous contractors and building suppliers increase prices after a natural disaster when demand is high. Automobile dealers stimulate demand through rebates and other discount offers.

Demand has the important characteristic of elasticity. Very elastic demand means that the quantity demanded (and bought) is sensitive to price. Here, the demand curve is much flatter. For example, as the price of coffee rises, consumers buy less and less coffee and instead buy substitutes, such as tea and colas. Inelastic demand means that the quantity demanded is insensitive to the price of the good or service. For example, people with diabetes will buy the same amount of insulin despite the price, their demand for the good is inelastic, and the curve is steeper.

A demand curve is a graphical representation of the relationship between price and quantity demanded. A demand curve can be drawn for any good or service in the market, and the curve always slopes down and to the right. Although many actual demand curves have been determined for various products, they are more helpful in understanding economics concepts. Figure 12.1 shows a typical, hypothetical demand curve, in this case for crowns. As the price of crowns increases, fewer people are willing and able to afford this service; the quantity demanded then decreases. Any individual buyer will reach a point where they refuse to buy any additional units because they have fulfilled their needs or because their opportunity costs are too high. Their demand is essentially satiated. However, as the price decreases, more buyers come into the market and are willing to purchase the good, although other consumers may have dropped out of the market.

An individual consumer’s demand for services will vary depending on income level, future expectations, and personal wants and desires. Demand curves are generally determined for the entire market, and market demand is equal to the sum of all individual demands. This realizes that some consumers will never buy the product (e.g. gold crowns) at any price, others may buy many products at an unlimited price, and most fall on a continuum between the two extremes.

SUPPLY

To this point, only one side of the economic exchange, the buyer, has been examined. The behavior of the seller or producer (the “supplier”) is equally essential to the transaction.

To the economist, supply means the quantity of a good or service the supplier can sell at every possible price. Suppliers are usually thought of as those who own factories, shoe stores, or dental offices. These are the suppliers in the product market for final goods and services. However, there is a similar market for resources to produce the goods. Producers must compete in the open market for wheat for bread, steel for cars, and an hour of the hygienist’s time.

Supply then defines a relationship between the price of a commodity and the number of units the seller is willing to supply. The resulting law of supply states that “as the price of any good increases, the quantity of that good that suppliers are willing and able to offer for sale will increase. Suppliers will supply a larger quantity of the goods as price increases.” This is a direct relationship: as one factor gets larger, so does the other. Supply displays the characteristic of elasticity similar to demand. Elastic supply means that a change in the price of the good leads to a large change in the quantity supplied.

A supply curve is a graphical representation of the relationship between price and quantity supplied. A supply curve can be drawn for any good or service in the market, and the curve always slopes upward and to the right. Figure 12.2 shows a typical, hypothetical supply curve, in this case also for gold crowns. As the price of gold crowns increases, dentists are willing to work harder and produce more products; the quantity supplied then increases. Any individual seller will reach a point where they refuse to produce any additional units because they have fulfilled their needs or because their opportunity costs are too high. Their supply is essentially satiated.

An individual producer’s supply of services will vary depending on factors such as the cost of production, degree of profitability, future expectations, and personal wants and desires. Supply curves are also determined for the entire market. A market supply is equal to the average of all the individual supplies. The obtainable profits mainly determine the market supply. If supplying the good or service is lucrative compared with other forms of income generation, then more people will attempt to become suppliers. The size of the market, social climate, and barriers to entry limit the number of successful suppliers. Dentistry, for example, has steep barriers to entry in that there are academic dental school entrance requirements, a limited number of dental school places, licensure requirements, and high start‐up costs. These barriers keep the supply curve for dentistry stable.

There is mixed support for the idea that having more health service providers lowers public costs. The opposite may be the case. It is well established that the number of surgeons in an area determines how much surgery is done there. Dentistry may follow a similar pattern. Rather than competition stimulating price reductions, it may increase prices in an area. One explanation for this apparent paradox is that practitioners may need to generate a certain amount of money to meet expenses and have a targeted income for themselves. According to this “target income hypothesis,” fees in an area will increase until practitioners meet those needs.

MARKET EQUILIBRIUM IN DEMAND AND SUPPLY

A “market” occurs when suppliers and demanders (consumers) exchange value (money). In a dynamic market, changes are expected to take place in both supply and demand for services as the underlying conditions change. When the forces of supply interact with the forces of demand, a market price is established, an equilibrium point where the supply and demand for those same goods are equal. Graphically, this occurs where the upwardsloping supply curve and the downward‐sloping demand curve intersect (Figure 12.3). The equilibrium point for the quantity demanded is shown at point A on the graph; the equilibrium point for the price is shown at point B.

A market is never in exact equilibrium. Instead, there is fluctuation as producers and consumers adjust to changing conditions. A market shortage is a condition in which the demand for a good or service is greater than the supply of that good or service. The price then rises as consumers bid up the price. More dollars then chase fewer goods until suppliers produce more goods or services or more suppliers enter the market (increasing production) to take advantage of excess profits. A market surplus is a condition in which the supply of a good or service is greater than the demand for that good or service. Prices drop as suppliers accept less to sell products. Profits for producers decrease as the price falls. Eventually, inefficient producers are forced from the market as profit margins decrease.

If a good is freely traded, shortages and surpluses do not last. The forces of market competition cause a readjustment of prices, and that establishes a new equilibrium. Those willing to pay more will get what they want, pushing up prices and eliminating the shortage. Those willing to sell for less will gather sales, driving down prices and eliminating surpluses.

Resource markets behave similarly to final goods and services. Businesses become the demanders, and households (and the people who make them up) are the suppliers. Dentists compete not only with each other for staff services but also with alternative forms of employment. A shortage will occur if dentists, as a group, do not pay a wage comparable to similar forms of employment, given similar backgrounds, training requirements, and working conditions. This drives the price of staff members up. Suppose an individual dentist wants to hire a hygienist at less than the market rate for hygienists. In that case, they probably cannot hire one unless other non‐wage factors (e.g. benefits, time off, convenience) balance the hygienist’s opportunity cost of a lower wage.

PUBLIC AND PRIVATE GOODS

Any time economists speak of economic “goods,” they are referring to anything that is both desirable and limited and to obtain which people will give up something else. Goods may be physical items for sale (e.g. cars, televisions, or shampoo) or services that consumers buy and use immediately (e.g. haircuts, dance lessons, or massages). Dentistry sells physical products such as dentures, partials, and restorations and less tangible service “goods” such as prophylaxes, endodontics, whitening procedures, or extractions. Some people even view intangible items such as leisure time and health as goods because people are willing to sacrifice to “buy” these commodities.

Economists often speak of public or private consumption goods. Private consumption goods are purchased and consumed by individuals rather than the whole society. (A whole group may individually purchase and consume the good, but that is not done as an act of the whole, rather as acts of individuals.) When individuals purchase DVD players, vacations, automobiles, and food, they consume those goods privately. If someone cannot pay the price required, they are excluded from having the use and benefit of the good. Public consumption goods benefit the whole of society or at least many people. National defense, the road system, and police and fire protection are examples of public goods enjoyed equally by most people. Society cannot legitimately exclude those who cannot pay from enjoying the use and benefit of these goods.

Because private suppliers cannot exclude non‐payers from enjoying public consumption goods, they generally will not provide these goods on a for‐profit basis. Instead, the government provides public consumption goods. (Government may contract with private suppliers to provide the good or service, but the government is still ultimately responsible.) There is a significant ongoing debate in the United States over what a public good is and what level of those services the government should provide. People believe that healthcare, medical care, and dental care “fit” as private or public goods. Depending on the answer, a different set of financing, access, delivery, and pricing policies will result.

Presently, US society considers dentistry a private consumption good. People will purchase as much of the service as they want and can afford. Although the government provides some dental services, people do not have unlimited and equal access to the service. Because dentistry is a private consumption good, it follows the economic laws of supply and demand.

ECONOMIC CHOICES

Economists believe that all economic resources are limited. That is to say that everything people use to produce or purchase the economic goods and services that they desire is limited or scarce. Because these resources are limited, people must choose between alternatives that provide satisfaction. The choice not taken is lost and therefore sacrificed. This sacrifice is called an “opportunity cost.” For example, a family may have a given income. They want to purchase both a new car and a larger home. Because of their income limitations, they cannot purchase both goods (the car and the home). Instead, they must decide between the two. If they choose to buy the car, they lose the enjoyment of the new home (an opportunity cost). However, if they decide to make a down payment on a new home, they forgo the satisfaction of the car.

The notion of economic choice applies to both producers and consumers. Different people weigh the values of goods and services differently, and therefore the opportunity cost of forgoing those goods. A consumer with limited resources may need to decide between a vacation and extensive dental work, and the opportunity cost associated with forgoing each option will help to decide. As a producer, a dentist must decide the value of economic goods such as leisure and recreational time. Although a person may have the opportunity to make additional income by working longer hours, they will weigh the opportunity costs associated with forgoing time for personal and family enjoyment.

THE MICROECONOMICS OF DENTAL SERVICES

Since dentistry is a private consumption good, it should react to the marketplace’s forces of supply and demand like any other consumer good. Moreover, that is what happens, and these macro forces occur through an aggregation of individual micro choices. When thinking about the overall demand for services, more (but not all) dental patients respond as the macro theory predicts.

ECONOMIC CHARACTERISTICS OF THE DENTAL CARE MARKET

Given the previous discussion, the following can be said regarding the dental care marketplace in the United States.

• The purchase of dental care follows traditional supplyand‐demand economics, and dentistry is a private consumption good.
• Not all consumers purchase dental services for the same reasons, at the same prices, or with the same convictions.
• The supply of practitioners does not change abruptly but instead ebbs and flows as conditions change. Significant barriers to entry exist for dentistry, and no one expects this to change significantly soon. The supply of dental practitioners is relatively steady, and demand fluctuates more quickly.
• Demand for dental services is tied closely to disposable income. As such, it varies with general economic conditions, third‐party coverage, and alternate forms of spending. Presently, demographic factors indicate increasing demand for dental services across all population groups.
• Increasing demand for services with relatively tight constraints on the supply of services leads to higher service prices and higher income for providers. Recent trends show dental incomes to be steadily rising, both on a current dollar and an inflation‐adjusted basis.

GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) is a measure of general economic prosperity for a country for a given period. It is the sum of the market value of all goods and services produced. When GDP is increasing, the economy is growing. People then produce more goods and services, and more have jobs and can afford to purchase those goods and services. Money ripples through the economy as it passes from hand to hand. General economic prosperity is increasing.

Conversely, when GDP is decreasing, the production of goods and services slows. Unemployment increases and paychecks lower as businesses lay off workers to keep costs in line with lower production. This general economic slowdown spreads through the economy as fewer people have extra money to spend on goods and services.