Question

When someone's kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that the supply of such dialysis machines will primarily determine the price.

Short answer

In this scenario, the demand for dialysis machines is relatively inelastic as they are a matter of life and death. To illustrate how the supply of dialysis machines primarily determines their price, we sketch a supply and demand diagram with an almost vertical demand curve and an upward-sloping supply curve. The equilibrium point represents the price where the quantity of dialysis machines that consumers are willing and able to buy equals the quantity that suppliers are willing and able to produce. Due to the inelastic demand, any change in supply will result in a change of prices, while the demand remains fairly constant. Hence, in this case, the supply primarily determines the price of dialysis machines.

Step-by-step solution

Understand Supply and Demand

In economics, supply and demand are fundamental concepts. Demand refers to how much (quantity) of a product or service is desired by buyers. Supply represents how much the market can offer. The price is the point where supply and demand meet.

Identify the Nature of the Good

In this case, dialysis machines are a necessity for those with kidney failure - a matter of life or death. This means the demand for dialysis machines is relatively inelastic. In other words, changes in price have little to no impact on the quantity demanded.

Sketch the Demand Curve

Next, sketch an almost vertical demand curve on a graph with Price on the Y-axis and Quantity on the X-axis. An almost vertical curve indicates inelastic demand.

Understand Elasticity of Supply

The supply of dialysis machines can be elastic or inelastic depending on factors such as time period, production capacity and the availability of resources. But here, there is no such specification. To elucidate the scenario where supply of dialysis machines primarily determines their price, this solution assumes that the supply is somewhat elastic.

Sketch the Supply Curve

An upward sloping line indicates the supply curve because suppliers are willing to sell more at a higher price.

Set the Equilibrium Price

The intersection of the supply and demand curves is called the equilibrium. This is the point where the quantity of dialysis machines that consumers are willing and able to buy equals the quantity that suppliers are willing and able to produce. This price will primarily be determined by fluctuations in supply: if supply decreases, the price will increase, and if supply increases, the price will decrease. Remember, when the demand is inelastic as in the case of dialysis machines, any change in supply, whether it increases or decreases, will result in a change of prices. The demand will remain fairly constant due to the necessity of the product. Hence, in circumstances like this, supply primarily determines the price of a product.

Key concepts

Elasticity of Demand

When we talk about the elasticity of demand, we are discussing how sensitive the quantity demanded of a product is to a change in its price. For some products, like luxury goods, a slight increase in price could lead to a significant drop in demand. These products have elastic demand. But, for essential goods like dialysis machines, the situation is different.

**Understanding Inelastic Demand:**

• Essential goods tend to have inelastic demand because consumers will continue to purchase them even when prices rise.
• The demand curve for an inelastic product is steep, almost vertical, which shows that quantity demanded does not change much with price.

In the case of dialysis machines, the life-saving nature of the product means that changes in price have little to no effect on the quantity demanded. This means the demand curve is steep, reflecting inelastic demand. For patients with kidney failure, there are no alternatives, effectively making their demand for dialysis machines a necessity, rather than a choice.

Elasticity of Supply

Elasticity of supply refers to how much the quantity supplied of a product changes when there is a change in the price of the product. For dialysis machines, the elasticity of supply can vary based on several factors, although it is often considered more elastic than the demand.

**Factors Affecting Supply Elasticity:**

• Production Time: If it takes a long time to produce more units, supply may be inelastic.
• Availability of Inputs: If resources required to make the product are readily available, supply is more elastic.
• Technological Advancements: Improvements can make it easier and quicker to increase production, thus increasing elasticity.

In the case of dialysis machines, it is assumed the supply is somewhat elastic. This suggests that manufacturers can respond to price changes by increasing or decreasing production. This flexibility is crucial, as it is the supply that primarily affects the equilibrium price when demand is inelastic. As suppliers can adjust their outputs, they influence the market price significantly.

Equilibrium Price

The equilibrium price is where the supply and demand curves intersect. This is the price at which the amount of the product consumers want to buy equals the amount suppliers are willing to sell.

**Understanding Equilibrium in the Context of Dialysis Machines:**

• The demand curve is steep due to inelasticity, meaning price has minimal effects on demand.
• The supply curve is upward sloping, suggesting that suppliers can adjust quantities based on price changes.

In a scenario where the demand is inelastic, the equilibrium price will be driven more by changes in supply. If the supply decreases due to production issues or increased costs, the equilibrium price will rise because the available quantity still falls short of the required amount. Conversely, improvements in technology or increased input availability can lead to a greater supply, reducing the equilibrium price.

This balance ensures the market is efficient, with dialysis machines supplied matching the urgent needs of patients at an equilibrium point set largely by supply variations.