At Work

Supply does create demand … sometimes

Paul Krugman writing an Op-ed in the NYT 11-3-15 talks about the ills of austerity and references several noted economists who state that supply does not create demand. I’m not qualified to argue his issue, except 😷😷😷

In particular, quite a few economists seemed utterly unaware that Say’s Law – the proposition that supply creates its own demand, that shortfalls in aggregate demand were impossible – had been refuted three generations ago.

In fact, not only doesn’t supply create its own demand; experience since 2008 suggests, if anything, that the reverse is largely true – specifically, that inadequate demand destroys supply. Economies with persistently weak demand seem to suffer large declines in potential as well as actual output.

I maintain health care is the exception. Health care can and does create its own demand. Once you enter the system, you effectively lose control. An increasing supply of health care services does not create price lowering competition and most certainly does create its own demand.

Every new piece of equipment must be used, every new practice must have patients, every lab must perform tests and virtually no one uses any of these services voluntarily and typically moves from one service to another at the direction of the primary supplier. 

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6 replies »

  1. Demand must precede supply…

    DEFINITION of “‘Demand”- An economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.

    In the case of healthcare, Apple, Southwest or whatever, entrepreneurs recognize an unfilled demand which exists and create the supply to satisfy that demand. If an entrepreneur creates a product based on his assessment that a demand exists for it and it does not, then that product fails. Demand whether recognized or not precedes supply.

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    • I disagree. Supply creates demand which is why regulators monitor how many hospitals get approved in an area and why physicians must disclose financial interest in medical facilities. If a physician opens a practice in an area, he creates demand for his services, associates refer to him and we are off and running. Who tells you to return for another visit, get a test or see a specialist? The supplier. Patients are incapable of creating their own demand except for their first entry into the system. If this were not true with the plentiful supply of physicians in an area there would be great competition for patients in many forms including price. That does not happen.

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    • No. Had Apple not created the ipad, no consumer would have demanded it. It wasn’t as if Apple realized there were some consumers out there who wanted an ipad. In effect, Apple supplied something not in existence, not in demand, and created demand.

      You state: “… entrepreneurs recognize an unfilled demand which exists and create the supply to satisfy that demand. …” Confirm for me which person was interested in an ipad before Apple created it. Show me the focus group where someone shared their need for an ipad before Apple created it.

      That people recognized that they wanted an ipad once it existed, that is not demand which triggered supply.

      I would like to have a lot of computer stuff, but, even though I have been working with computers since 1969, back to the days of paper tape and shared time, I never demanded an ipad be built. But, I do own a mini today.

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  2. “Once you enter the system, you effectively lose control.” That is so utterly false it really should need no refutation. I am 68 years old and have both assented to and refused medical procedures throughout my life. I have assented to and refused the services of some doctors – likewise drugs. It is true an unconscious patient may have procedures done with “no control” on their part. But unconscious patients make a tiny per centage of the population of patients.

    Could you please explain how in the world you came to your preposterous conclusion?

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    • YOU may do as you say, but I can tell you with 100% certainty that the average person does not do that. They follow directions, ask few questions and in many cases they make no attempt to manage their care among different providers they may be using. They also fail to even tell doctors about other doctors and or their medications. The aura of the authority physician is still with us.

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  3. An easier example, the iphone, ipad.

    The Apple marketing philosophy embraced, way ahead of its time, the concept of consumer empathy – actually caring how people would interact with a device.

    If we were in charge, we might channel Einstein: “Everything should be made as simple as possible, but no simpler.” Diverging from the Japanese manufacturers of the day, Apple pursued consumer empathy before they even had consumers. Back then, we had no mouse, we had main frames, we had data crunching geeks (I was one of them, working/interfacing with an IBM 360-50 at the Cleveland Fed) – it was a time of pong (remember pong?!).

    Apple took the initiative to understand the consumer’s needs before they actually needed what Apple decided to make. That’s why they are the largest (in terms of capitalization) company in the world. For me, what has been totally surprising has been their ability to maintain their superiority. But, not too surprising, because they were one of the first to try to empathize with the consumer before a market was even developed, and they continued to look forward and anticipate consumer behavior.

    Clearly, Apple created demand when it supplies new product.

    Another example, for me, would be Southwest. Point to point, frequent travel changed the paradigm of air flight. Sure, it happened almost entirely after deregulation. Sure, Southwest leveraged its fuel purchasing strategy into a competitive financial advantage. But, I remember waiting, waiting for Southwest to fly east out of my location (until about 2000 or so), to BWI. For four years, I would travel to an airport just 150 miles away from my home, where they flew to BWI, instead of the only 20 mile commute to my regular airport – all to avoid paying $200-$300 more for a round trip.

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