Resource allocation and markets

What am I expected to understand about markets?

- Why markets are potentially a useful way to allocate scarce resources?

1- In a PERFECTLY functioning markets, Outcome are generated in an OPTIMAL level: meaning: 

In an ideal market, supply and demand balance perfectly, leading to:

• Efficient ALLOCATION of resources.
• MAXIMUM societal welfare.
• Prices reflect the TRUE costs and benefits of goods or services.

But in reality:

• Consumers are unable to know what they want, compare prices, and choose the best option.
• Suppliers may not compete, keeping prices reasonable and services efficient.

All are due to unique features like uncertainty, information asymmetry, and externalities.

2- Undersatnding how markets work to understand why they fail: and relating the failure to when the conditions for perfect competition don’t hold, leading to inefficiency.

3- Governments interventions in healthcare markets: 

• Governments intervene in healthcare to correct market failures and ensure equitable access.
• However, even with intervention, market forces still play a role in some areas of healthcare.

Examples of Government Intervention: Price controls, subsidies, Universal coverage

Universal Coverage:

• National health systems (e.g., NHS in the UK) ensure basic healthcare is accessible to all.

The essence of markets: is the determination of Prices and Quantities! in other words BALANCING supply and demand

Markets Are Potentially Highly Efficient

• What It Means:

  • Markets efficiently allocate resources by matching:
    • Producers’ incentives: Profit motivates producers to offer goods/services.
    • Consumers’ needs: Consumers pay for what they value most.
  • This decentralized approach often works better than planned systems.

Coordination Through Price and Quantity Signals

• What It Means:

  • Markets coordinate the actions of consumers and producers using price signals:
    • A high price indicates scarcity (producers increase supply; consumers reduce demand).
    • A low price indicates surplus (producers reduce supply; consumers increase demand).

Alternatives Like Central Planning Have Higher Costs

• What It Means:

  • Central planning involves a governing body making decisions about:
    • How much to produce.
    • How to distribute goods/services.
  • This system can be less efficient because:
    • It requires significant administrative resources.
    • It often lacks real-time information about supply/demand changes: Central planning often lacks real-time information about supply and demand changes because decisions are made based on predictions, estimates, or outdated data, rather than dynamic feedback mechanisms like in a market.

Assumptions for Perfect Competition in Healthcare:

1- Atomistic competition (Price takers): this is how firms behave and no single firm controls the market price

2- Firms try to maximise profits: Producers…