As the novel coronavirus first swept across the world in early 2020, very few people understood the impact this little-known disease would have. In just a few weeks, hospitals in major outbreak cities were buckling under the sudden influx of patients in dire need of medical assistance. Intensive care units reached capacity in record time, personal protective equipment or PPE was used, reused, and reused again until it literally fell apart in some cases, and health care workers everywhere worked around the clock in a desperate race against time to save patients and fight back the coronavirus. The demand for medical care was great, but the supply of resources and workers to provide it was not nearly big enough. Supply and demand are key to understanding the impact of the coronavirus on the health care economy, but they’re also key economic concepts. Understanding the economic foundations of supply and demand helps to explain the impact of COVID on hospitals around the world.
What is supply and demand?
Supply and demand is one of the most basic and most important economic concepts in the world. In its most basic form, supply and demand refers to the relationship between the availability of a given resource and the demand in the market for that given resource. It’s the formula people use to calculate the price for any given item.
For example, a child running a lemonade stand on a hot summer day is likely going to sell a lot of lemonade. Why? They have a limited supply of cooling and refreshing beverages, and people who are outside in the heat are going to be willing to pay more to refresh themselves.
That same child running a lemonade stand on a rainy fall day will not sell as much lemonade, because they are trying to sell a cool and chilled drink on a cold and chilly day. Not as many people will be outside or in need of a glass of lemonade to cool down.
Think of supply and demand as two opposite ends on a scale. In a perfect economy, every object would always be perfectly balanced, with exactly as much of a product available as there are people who want to buy it. The economy is functioning at its healthiest and the most money is exchanging hands when there is a balance of supplied items and demand for them in the market. You can learn more about the economic theory behind supply and demand here. When the scale is unbalanced, the economy suffers. The coronavirus pandemic is just one example of how that unbalanced scale can quickly become fatal.
What happens when the you have more demand than supply?
When the coronavirus first struck, there were certain medical items that were in immediate demand, including
- Respirators and ventilators
- Hospital beds
- Masks and gowns
All of the medical equipment that was essential to safely treating and saving severe coronavirus patients was suddenly needed, everywhere. Within the first month of the disease hitting the United States, they needed close to one million ventilators available to help struggling patients breathe. The most generous estimates thought there were somewhere around 160,000 actually available.
This is the perfect example of an unbalanced supply and demand scale. The demand for ventilators was far greater than the available supply, driving the price of ventilators up because more people were competing for less product.
What happens when you have more supply than demand?
While the demand for medical care surged and people struggled to match supply, in other sectors of the economy, the reverse was occurring. In entertainment industries, the demand for services had been almost entirely eliminated, including locations like:
- movie theaters
- theme parks
No one was booking live entertainment or hospitality stays, so the demand for their services plummeted even as the supply of available resources remained constant. As a result, companies dropped rates in an effort to get more people to purchase them. When that didn’t work, many companies closed temporarily, then permanently. It’s estimated that over 250,000 small businesses across the world have closed forever because of the pandemic. There was no demand, the scale was tipped too far in the other direction, and many business owners and employees simply could not recover.
Are supply and demand curves still unbalanced today?
As the coronavirus pandemic continues, we are beginning to see countries get a better handle on the supply and demand balance within their medical sector. Many companies converted their manufacturing facilities to produce needed medical equipment, making more equipment available and causing prices to stabilize as the curve begins to creep towards equilibrium.
The entertainment industry is adapting to a lack of live offerings, turning services virtual or offering their spaces up for medical workers to use as emergency care locations. The demand for these sectors of the economy is slowly beginning to return. The scales are not yet perfectly balanced, and as waves of resurging COVID cases continue to hit the supply and demand curves react with dips or spikes. Only time will tell if they will be tough enough to weather the damaging impact of COVID.