The Economic Concept and Tools in Healthcare Institutions


Background to the study

Controlling the cost incurred in the provision of various services in most health care organizations has been a problem for a long time. There are many costs involved in this case. The three basic costs are most often involved with inventories (that is) holding, ordering, and shortage costs (Ozcan, 2005, p. 256). The holding costs are basically related to those incurred in physically availing the medical supplies in the storeroom. These also include the interests in the money borrowed to purchase the items, warehousing, insurance, security, compliance with industry and regulatory authorities and even outdated medications among others.

The ordering costs include the time and effort involved in the calculation of the number of supplies needed. It may also include the efforts spent in the preparation of invoices, an inspection of goods for quality and quantity, and movement of the items to temporary or appropriate units.

The shortage costs occur as a result of shortages in the appropriate medical supply at a given time. These range from the opportunity cost incurred from losing a patient’s or doctor’s benevolence, to the threat of lawsuits and even the resultant dead of a patient. These costs are always extremely high and can even threaten the financial capability of the healthcare business.

Many of these costs may be as a result of external factors that are associated with the healthcare industry. The state regulation authorities consent how many of a certain type of staff must be available in an organization at a given time for a given medical procedure. This may also include the requirement for individual physician offices to have nurses if they are bound to handle patients of the opposite sex. These authorities do also regulate the number of working hours for some individual staff members in such institutions (Mitch, n.d.). Some costs are also incurred in maintaining certain working areas in which specific procedures are carried out especially when such areas are not in use for lack of patients. And finally, because most of the healthcare management personnel are trained in specific areas of expertise, they are often inefficient when it comes to controlling the costs within their own departments.


This report is aimed at determining the contribution of various economic tools and concepts in managing the various costs incurred in healthcare institutions.


The report entails the identification of the important concepts applied in economics, which can help when it comes to cost control in the healthcare industry. These include supply and demand curves, marginal analysis and elasticity of demand and supply among others. The report elaborates on the applications of these concepts including reviewing the graphing techniques involved in their applications.

What are the economic concepts and tools that the healthcare industry uses?

Demand vs. supply curve

Market players usually rely on both the demand and the supply curve for purposes of ascertaining the price of goods and services in the market. The rules of a supply and demand curve hold that the prices of a given commodity shall be in such a way as to equilibrate the available demand for such a product or service in the market. However, such a move on the supply and demand curve must be in tandem with the amount of product in question on supply. Ultimately, this translates into what is commonly referred to as an economic equilibrium. The amount demanded of a good or service at a particular time can be as a result of many reasons categorized as either a change in the price, and everything else. The effect that is caused by a change in price on the quantity is indicated by a movement along the demand curve. On the other hand, effects of other causes of change in demand are shown by a shift in the entire curve (Daly &Farley, 2004, p.141). This can be represented as follows:

Demand vs. supply curve

The law of demand states that, when all factors are held constant, the higher the price of a good or service, the lower the demand of the same. From the graph, A, B, and C are points on the demand curve. The individual points that have been depicted on the graph are symbolic of an association between on the one hand, price, and on the other hand, demand. It can also be noted that, the higher the price, the lower the demand (A), and the lower the price, the higher the demand (C).

As for the law of demand, the law of supply shows the amount of goods and services to be sold at a given period. But unlike the former, the supply curve shows an uphill slant. In other words, a higher volume of goods will be demanded as the price of such a good in question increases. In this case, producers tend to increase their supplies with the intention of increasing their overall revenues as well. This is elaborated by the following graph;

Demand vs. supply curve

From the graph, each point on the curve indicates the correlation between the quantities supplied (Q) and the price (P).


Elasticity is a term used in reference to how a demand curve is able to respond to price changes of a commodity (Daly and Farley, 2004, p.146). Elasticity in the demand curve is represented as shown below;


Going by the demand curve shown above, we can deduce that the curve provided is negative in nature. Therefore, when the demand of a commodity is very high in relation to a very small price increment of a commodity, we end up with a curve that appears horizontal. What this indicates is that we have an elastic product. In contrast, when we have an inelastic demand for a good or service, the curve in this case appears upright in nature. In this case, a very minute alteration in the quantity of a product in demand translates into a very high alteration in the price of such a commodity. It should also be noted that elasticity in supply behaves the same way as for the demand.


Healthcare managers should be in a position of solving problems related to costs incurred in the provision of various services if they employ the tools and concepts of economics discussed above in their investment strategies.

This also should involve a sound plan in which one follows certain prescribed steps for successful decision-making. These steps involve; identification of the problem and its nature, specification of the objectives and decision criteria and development of alternatives. After that, the immediate step should involve analysis and comparison of the alternatives. Selection of the best alternative will put one in a position of implementing the choice and finally controlling or monitoring the results.


The healthcare managers must ensure efficient staff scheduling is maintained through procedures that allow vacations to unnecessary employees when the workload permits. And through the application of linear programming, they will be in a position of solving problems associated with resource allocation to various departments in the institution.

Most of the costs incurred can also be controlled through the timely placement of orders. This should only be done after one has assessed the market situation and made comparisons where necessary. This will also allow one’s business to compete adequately with other businesses that are offering the same services.

Reference List

Daly, H.E., and Farley, J. (2004). Ecological economics: principles and applications. Washington, DC: Island press. Web.

Forbes Digital Company. (n.d.). Economics basics: demand and supply. Web.

Forbes Digital Company. (n.d.). Economic basics: elasticity. Web.

Mitch, M. (n.d.). Management problems in healthcare. eHow, Inc. Web.

Ozcan, Y. A. (2005). Quantitative methods in healthcare management: techniques and applications. San Francisco, CA: Wiley publishers. Web.