Demand for blood transfusions is falling, forcing down prices and reshaping the market. Case study suitable for classroom use

1. Economics for your Classroom from
Ed Dolan’s Econ Blog
The Looming Blood Surplus:
A Case Study in
Supply and Demand
September 15, 2014
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the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.

2. A Market for Blood?
 Many Americans, used to donating blood in
exchange for a warm glow of public service
rather than cold cash, would be surprised to
learn that the blood they donate flows
straight into the market economy
 In fact, blood is a $3 billion business.
Donated blood is processed, stored, and
sold to hospitals by commercial brokers
and by not-for-profit organizations like the
Red Cross.
 The market for blood is entering a period of
turmoil
September 15, 2014 Ed Dolan’s Econ Blog

3. Transfusions save lives, but . . .
 Blood transfusions save lives on the
battlefield and in emergency rooms, but
they also carry a risk of infection
 New medical standards recommend fewer
transfusions for procedures like open heart
surgery
 In common operations like joint transplants,
doctors have cut use of transfusions by as
much as 75 percent
Medics prepare to administer a
transfusion to a wounded soldier
September 15, 2014 Ed Dolan’s Econ Blog

4. Question: How Do New Medical Techniques Affect Price?
How do new medical techniques affect the
market for blood?
 Does the demand curve shift? If so, show
the new demand curve
 Does the supply curve shift? If so, show
the new supply curve
 Show the new equilibrium price
September 15, 2014 Ed Dolan’s Econ Blog

5. Answer: How New Medical Techniques Affect Price
 New medical techniques mean that the
amount of blood purchased at any given
price will decrease
 That change is shown by a shift of the
demand curve to the left, from D0 to D1
 The technologies do not directly affect the
costs of supplying blood, so the supply curve
does not shift
 In response to the decrease in demand,
producers move down and to the left along
the supply curve
 The market reaches a new equilibrium at the
price P1
Sept. 15, 2014 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

6. Restrictions on donations
 FDA regulations place certain restrictions
on blood donations
 For example, since the 1980s, donations
from gay men have been completely
banned
 In view of new testing and screening
techniques, the American Red Cross and
the American Association of Blood Banks
consider the current FDA ban to be
“medically and scientifically unwarranted.”
 It is estimated that lifting the ban would
increase total donations by about 1.4
percent
Bloodmobile collecting donations
for Children’s Hospital Boston
September 15, 2014 Ed Dolan’s Econ Blog

7. Question: How would changes in regulation affect the market?
Other things being equal, how would
relaxation of restrictive regulations
affect the market? (Begin from P1 in
your answer to the previous question.)
 Does the demand curve shift? If so,
show the new demand curve as D2
 Does the supply curve shift? If so,
show the new supply curve as S1
 Show the new equilibrium price as P2
September 15, 2014 Ed Dolan’s Econ Blog

8. Answer: How changes in regulation would affect the market
 Other things being equal, a relaxation
in regulatory restrictions would mean
that more blood would be supplied at
any given price
 The supply curve to shift rightward
from S0 to S1 as shown here.
 Other things being equal, such a
change in regulation would not affect
the demand curve
 The market moves down along the
demand curve as shown until the
price falls from P1 to a new equilibrium
at P2
September 15, 2014 Ed Dolan’s Econ Blog

9. Is the price really falling?
 There is no single, transparent, market for
blood as there is for wheat or crude oil.
However, reports from individual market
segments show widespread downward
pressure on prices
 Example: Competition between suppliers
in Indianapolis has pushed the price down
from $220 per unit to $180 or below
 Example: Downward pressure on blood
prices is reflected in falling prices for the
stock of companies like Haemonetics
Corp., a supplier of software and materials
to blood centers One unit of frozen blood plasma
September 15, 2014 Ed Dolan’s Econ Blog

10. The Bottom Line
 Major market participants are treating
the decrease in blood prices as
permanent, not temporary
 The combination of better surgical
techniques, lower infection risk, and
lower prices makes this a good
news/good news story for consumers
For a more detailed account of
developments in the blood market, see Ed
Dolan’s Econ Blog for Sept. 15, 2014
September 15, 2014 Ed Dolan’s Econ Blog

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