Applying Economics

Economics is a social science, not a physical science.

— Jim Stanford

INTRODUCTION

Everyone’s life, including that of a practitioner, is filled with examples of economics and its governing principles. We live in world where goods and services are often limited. No one person possesses all of them. This situation necessitates trade among individuals to obtain the right resource mixture. Most exchanges occur without us understanding or appreciating the core theories behind them. However, the outcomes of these barters play a critical role in the health of a business. Naïve strategies used during exchanges lead to suboptimal outcomes.

Economics is really a game between 2 teams—the suppliers and the demanders. The primary medical example most people associate with this is the supply of doctors to the demand of patients. A deeper look into this study reveals its wider application all around us. For example, providers can play on one side or the other depending on the circumstances. On one hand, they supply goods like glasses and services like refractions. On the other hand, they demand goods like hardware needed for electronic medical records and services like maintenance of their visual field machine. The successful eye care practitioner sees this as an opportunity and applies fundamental gameplay strategies to win in each situation.

This chapter navigates the reader through a process that explains fundamental economic principles and its uses in eye care. Initially, the discussion lays the groundwork with the topics of microeconomics and macroeconomics. The attention turns to resource exchange principles. These develop further with examinations into how resources are accounted for and produced. The goal of this chapter is to equip the practitioner with the essential skill set of identifying when these economic situations occur and how different parties behave to obtain these valued resources.

WHAT IS ECONOMICS?

Business exists because there are individuals who possess a resource and others that desire it. Those that wish to have it are willing to give up something of equal or greater value in exchange for it. This describes the basic rules of economics. The best owners understand this relationship and strategically position their organizations to excel when these opportunities present themselves.

Certain economic laws are derived from the interactions between suppliers and demanders. The correct application of these principles has a major impact on the prosperity of a business. Consequently, a lack of economic understanding leads to costly errors. Two frequent mistakes based on common misconceptions, for example, exemplify this issue. The first is that always producing more product will translate to greater profits. This is incorrect as situations exist where each additional unit hurts the business. The second is that the total cost associated with a product simply equals the money needed to buy the necessary parts to build it. In actuality, the determination of cost is much more complex as there are many other considerations. The takeaway is recognizing when these assumptions are inaccurate and correcting for them. The right thought process leads to the best decisions and better results.

ECONOMICS IN EYE CARE

The importance of comprehending and applying economic principles in eye care is illustrated by how practitioners go about procuring the required resources for their practices.1 In an era when profit margins are diminishing like in medical reimbursements, the ability to efficiently obtain and effectively utilize scarce resources becomes magnified. The ideal method to optimizing the relationship between a supplier and a consumer is to understand how basic principles of economics work. These lead to successful applications in different scenarios. Beyond those rules that dictate supply and demand, additional strategies on various aspects in this area can be applied. The fundamental wisdom in economics for the eye care practitioner to demonstrate are the following: understanding micro- and macroeconomics basics, appreciating supply and demand, minimizing cost, maximizing price, and optimizing scale.

Understanding Micro- and Macroeconomics

Importance

The core principles that businesses are built upon remain constant across all types and areas. What makes them and the marketplaces they work in different from one to the other are the assets involved in the transactions. The thought processes used and theories applied are the same. Successful individuals and organizations use an efficient methodology along with their experiences to obtain maximum results in these interactions.

Keywords

Economics: The study of how scarce resources are utilized in society

Scarcity: The condition that resources are limited in nature

Microeconomics: The study of how individual units or groups make use of resources and their interaction in markets

Macroeconomics: The study of how resources are used throughout an entire economy

Recession: A period of time when there is a reduction in the economy usually associated with a decline in gross domestic product

Gross domestic product (GDP): The value of all goods and services produced in a given period

Import: A good produced outside of a nation but sold within it

Export: A good produced inside of a nation but sold outside of it

Applications

Economic principles and applications govern the practitioner’s interactions with others, including patients, staff, vendors, and even family and friends. They exist because no one person possesses all the resources needed to function. Instead, individuals use trade to exchange one resource for another. This relationship becomes complex because the abundance of these resources can significantly vary from one to another. Therefore, each resource has a different value. Those with more scarcity have greater value relative to abundant ones.

These exchanges between individuals or small groups are categorized under microeconomics. For example, consider the situation where Teymoorian Eye Associates is looking to hire a new biller for the finance department. The practice is willing to exchange resources in the form of salary and compensation to acquire the time and skill set of a qualified applicant. The relative abundance of the job opportunities to the number of those seeking the positions will determine the fair market price in this situation. If there are more applicants than jobs, a lower salary can be offered as opposed to a situation where there are more jobs than applicants that would necessitate a higher salary.

However, these interactions are not restricted to those only involving a few individuals. Similar principles apply on a larger scale including between countries. These cases fall under macroeconomics. This does not mean that macroeconomic exchanges do not affect small groups. A single person still works in an environment influenced by the larger dynamics of a country.2 Issues like inflation and recession affect the provider’s daily practice. Additional topics such as gross domestic product and its affiliation with imports and exports also play a role. Successful practitioners understand these rules and their consequences. They then apply them in the decision-making process when applicable to make the best choices.

Immediate Action Items

In what marketplace does your practice reside? The simple answer is eye care. However, you need to carefully contemplate the question and be very specific about your answer. This is essential because, as you will see throughout the text, each chapter requires a clear understanding of who your company is and what it does exactly. Also, is this the correct marketplace you should be in or is there a better one that deserves to be considered? This will be addressed later as the subject matter needs to be built upon to answer it.

So, what exactly does your practice provide as a resource? For example, some offer a high-end premium experience that tailors to those having cataract surgery and want to be independent from glasses. Others would answer with providing a multi-specialty experience that has the capacity to manage a large volume and wide array of ocular diseases. Another set of responses would be to serve the local community for their general refractive and ocular needs along with dispensing glasses and contact lenses. Each of these represent a different marketplace to consider when making business decisions. Once your resource is identified, we can move onto higher-level questions and analysis to begin the strategic process.

Appreciating Supply and Demand

Importance

The central fact in these exchanges consists of one side having access to a particular resource and another side willing to give up something of value in return for it. Certain variables in each situation make one case different from another. However, distinct patterns develop over time regardless of the conditions. Prosperous practitioners recognize these configurations through experience and effectively implement strategies that maximize their return on these interactions.

If given adequate notice and ability to change the setting in advance, these same individuals also create an environment to further improve the outcomes. A chess game is a great example. Novice players are caught up thinking about their current move at any given moment. Experts are contemplating multiple steps ahead for themselves and their opponents prior to moving. The key is to think as many moves forward to produce the most advantageous series of steps. Again, it is not unusual to recognize that many economic theories are similar to those strategies played out in games.

Keywords

Market economy: The economy created when many different firms and households interact for goods and services in a marketplace

Law of supply: The idea that as prices for a good increase then the quantity supplied increases

Law of demand: The idea that as prices for a good increase then the quantity demanded decreases

Equilibrium: The price at which supply equals demand

Surplus: A condition when the amount of a supply available is greater than its demand

Shortage: A condition when the amount of supply available is less than its demand

Monopolies: A situation when one seller can supply all the demand of a market at lower costs than all competitors

Oligopolies: A situation when a few sellers can supply all the demand of a market at lower costs than other competitors

Game theory: The study of human behavior when placed in strategic situations like games

Applications

The relationship between buyers and sellers in a marketplace creates a market economy. There are basic economic principles that govern their interaction. These are the law of supply and law of demand. The law of supply is directly proportional to price. As the price of the resource is increased, the amount supplied will be increased. This is the opposite for the law of demand. It has an inversely proportional relationship to price where demand for a resource decreases as the price is increased. These curves change as the market economy varies. However, their meaning, along with the intersection joining them (the equilibrium point), remain the same.

This relationship can be illustrated by using the market economy for cosmetic blepharoplasty, in which Teymoorian Eye Associates participates (Figure 5-1). There is an equilibrium at a price point of $5,000 where the supply for available surgery by doctors equals the demand for that procedure. If the price is increased, there will be a surplus of supply that would result in unused surgical capacity. If the price is decreased, there will be a shortage of supply that would result in longer wait times before patients can have surgery.

This situation assumes there are multiples buyers and sellers participating in this space. There are instances when this dynamic shifts to where there are only one or few on either or both sides. Consider an example when there is only one supplier for a particular type of treatment such as selective laser trabeculoplasty. Teymoorian Eye Associates is interested in having the technology in the office to provide that service for its patients. The laser price will be controlled by the one company selling it due to the protection from patent. That company has a monopoly on the supply. The result is that they can dictate the selling price because there is no other competitor in that space. The company can adjust the price to create a surplus or shortage that meets their desire. Once new suppliers enter the marketplace as the patent for the laser expires, this creates an oligopoly. The dynamic improves for Teymoorian Eye Associates as prices will decrease because the original supplier will no longer have complete control of the availability for the resource. Similar interactions to these situations follow the principles of game theory.