David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

1.3 The role of the market
The role of the market
Markets bring together buyers and sellers of goods and services. In some cases,
such as a local fruit stall, buyers and sellers meet physically. In other cases, such as
the stock market, business can be transacted by computer. We use a general
definition of markets.
Prices of goods and of resources (labour, machinery, land, energy) adjust to ensure
that scarce resources are used to make the goods and services that society wants.
You buy a hamburger for lunch because it is fast, convenient and cheap. You prefer
steak but it is more expensive. The price of steak is high enough to ensure that society
answers the 'for whom' question about lunchtime steaks in favour of someone else.
A market is a process by which
households' decisions about
consumption of alternative
goods, firms' decisions about
what and how to produce,
and workers' decisions about
how much and for whom to
work are all reconciled by
adjustment of prices.
McDonald's is in the business because, given the price of beefburger meat, the rent and the wages for
staff, it can still sell beefburgers at a profit. If rents were higher, it might sell beefburgers in a cheaper area
or switch to luxury lunches for rich executives. The student behind the counter works there because a
part-time job helps meet his tuition fees. If the wage were lower, he might not work at all. Conversely, the
job is unskilled and there are plenty of students looking for such work, so McDonald's does not have to
offer high wages.
Scarcely a hospital bedl
•
Are we spending more on health, or are hospitals in decline? Real (inflation-adjusted)
government spending on health is 60 per cent higher than in 1990. So why do people think
health services are being cut? First, we are living longer. Of the UK population, the over-65s will rise from
23 per cent in 1980 to 31 per cent by 2030. Older people need more health care. The same total spending means
lower standards per person. Second, medical advances have made available successful but very expensive
treatments. We all want them.
Health spending is rising a little faster than national output as a whole. However, with an ageing population,
health spending must rise faster if people are to get the same standard of care as in the past. And to get any
new treatment, however costly, health spending has to rise much faster still.
The real issue is scarcity: on what to spend our limited resources? Do we have fewer teachers and televisions
in order to divert more resources to health? If not, we have to ration health care. Rationing can be done
through markets (charging for health care so people choose to have less) or through rules (limiting access to
treatment). Society's decision affects what is produced, how it is produced and, dramatically in this example,
for whom it is produced.
Better health services do not come free. The opportunity cost of having more nurses and doctors is the quantity
of education, entertainment and other outputs we have to sacrifice in order to divert more of our scarce
resources into health care.
Questions
(a)
A century ago, do you think health care was rationed? Explain why or why not.
(b) When the National Health Service made health care 'free at the point of delivery: did this mean everyone
could have as much health care as they wished? If not, how did the NHS ration health care?
To check your answers to these questions, go to page 683.
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