ABSTRACT
This chapter argues that there were good reasons, both theoretical and from the observation of behaviour, to expect downward-sloping demand curves and upward-sloping supply curves in health markets. An extreme set of simplifying assumptions lies behind the concept of the perfect market. It is best to think of a perfect market as you would think of a perfect square when studying geometry. The idea that demand curves ‘reveal preferences’ and are indicators of marginal values to consumers can be extended to produce the concept of ‘consumer surplus’. Consumer surplus is defined as the value to a consumer of trading in the market at the given price. The firm operating in this environment has perfect knowledge and therefore knows its cost curves, and the prevailing price on the market. The reader may at this point be feeling a little detached from reality. Almost every assumption of the perfect market model is a rare or non-existent phenomenon.
