Managing the financial side of a veterinary practice works the same way. Before you commit time, capital, and energy to a new enterprise or a major operational change, you want to have worked through it on paper first. That’s the whole idea behind planning budgets, and agricultural economists have been refining these tools for decades.

There are four planning budgets that agricultural economists recognize, and it’s worth knowing what each one is for, even briefly. A cash flow budget maps the timing of money moving in and out of an operation. Not just whether you’ll be profitable, but whether you’ll have cash available when bills come due. A partial budget is built for smaller, contained decisions: should I buy this equipment or keep custom hiring? Add this service? It only evaluates what changes and holds everything else constant. A whole farm budget zooms all the way out and is the tool you reach for when a proposed change is big enough to reshape the entire operation, like taking on a new facility or bringing in a partner.

Those three all have their place. But the fourth one is the enterprise budget. This is where things get interesting, and it’s the one I want to spend the rest of this issue focusing on. I think it’s time that veterinary medicine uses enterprise budgets more often, because they are the most useful for figuring out how to optimize the planning of your business.

An enterprise budget is a bottom-up analysis of a single activity within a larger operation, built on a per-unit-of-production basis (per acre, head of livestock, or procedure). The idea is to isolate one thing you do (or are thinking about doing) and ask: Does this pay? What makes this distinct from a simple profit-and-loss calculation is that it’s built to capture the full economic cost of a decision, not just the accounting cost. That distinction matters more than it might sound at first.

When you sit down to build an enterprise budget, you start with revenues. Every stream of income the enterprise generates, with realistic price and quantity assumptions attached. Then you work through costs in two layers. The first layer is variable costs, sometimes called operating costs: the inputs you consume to produce the thing, such as labor, supplies, and medications. These costs exist because you chose to produce; they go away if you stop. The second layer is fixed costs, or overhead that you’re on the hook for regardless of what happens in a given production period, such as machinery depreciation, land, buildings, insurance, and taxes. Agricultural economists have a useful shorthand for these: the DIRTI-5, standing for Depreciation, Interest, Rent, Taxes, and Insurance.

Once you have revenues and costs laid out, you calculate net return… but you actually calculate it twice, and both numbers mean something different. Returns above variable costs tell you whether the enterprise can survive in the short run, whether it’s at least generating enough revenue to cover what was spent to produce it. Returns above total costs tell you whether it’s viable over the long haul, with everything included. A business can limp along with negative returns above total costs for a while, but not forever.

Here’s where enterprise budgets get philosophically interesting, and where they depart from how most people informally think about profitability. A rigorous enterprise budget doesn’t just count the dollars you spend. It accounts for opportunity costs…you know that concept we keep talking about in almost every article now? But in this case, we can think about it as the value of the next-best thing you could have done with those same resources. This shows up in a few specific places that tend to get glossed over in informal financial thinking.

Owner labor is one. Many practice owners significantly undercount the value of their own time when assessing whether something is profitable. If you’re putting in forty hours a week managing an enterprise, that time has a market value. A well-constructed enterprise budget puts a number on it. Similarly, a management fee, typically around five percent of gross revenues, represents the return to your judgment, your organizational capacity, your decision-making..

Property is another. If you own the land and building on which your practice is operating, you might be tempted to treat the cost as zero because you’re not writing a rent check. But that land could be leased to someone else. The opportunity cost of using it yourself is the rent you’re foregoing. A complete enterprise budget captures that.

Once you’ve built a budget with true economic costs included, you can calculate something genuinely useful: break-even prices and production. The short-run break-even price— variable costs divided by production quantity — is the floor below which you’re losing money on every unit produced and should stop. The long-run break-even price — total costs divided by production quantity — is the floor below which the enterprise isn’t sustainable, full stop. This tells you exactly how much margin for error you have.

Agricultural economists have been building enterprise budgets for corn, soybeans, cow-calf operations, and poultry flocks for generations. Land-grant extension programs publish them freely. Lenders expect them. Beginning farmers are taught to build them before they’re taught much else about financial management. Veterinary medicine, as an industry, largely hasn’t adopted the tool, however, and I think that’s a missed opportunity.

Consider what a practice owner actually faces when evaluating a new service line. Should we add ultrasound? Expand into reproduction services? Offer a wellness plan? These decisions get made, but they often get made on intuition. An enterprise budget forces a more complete conversation. What’s the realistic revenue per procedure, and at what volume? What are the true variable costs — consumables, technician time, and the veterinarian’s time at its real market value? What fixed costs need to be allocated — the equipment depreciation, the additional insurance, the square footage? And critically: what’s the break-even procedure volume at realistic pricing, and is that volume actually achievable in your market?

Those questions have answers. They just require a structured tool to surface them. This isn’t a criticism of how veterinary practices are managed. But the enterprise budget framework is mature, well-documented, and freely available. It translates cleanly from a row crop to a dental service line. The logic is identical. Only the line items change.

Planning budgets, and enterprise budgets in particular, exist because decisions made on paper are cheaper than decisions made in the field. They force you to articulate your assumptions, confront your costs honestly, and stress-test your plan before the first dollar is spent. They make implicit trade-offs explicit. And they give you a shared language for talking through a decision with a lender, a partner, or your own skeptical inner voice.

Veterinary medicine is full of smart, analytically capable people who think carefully about complex problems every day. The enterprise budget is just one more tool for doing that, applied to the business rather than the patient. It’s worth knowing how to use it. And if you want to know more about them, or need help building one, you always have me in your corner to call!

I am sure every practice owner or business owner has had the following moment. You’re looking at a month-end report, you see “COGS” (cost of goods sold) glaring back at you, and the instinct is to treat it like a single lever: get it down, problem solved. And sure, COGS matters. It’s real money: drugs, supplies, lab fees, inventory shrink, all the stuff that has a vendor invoice attached to it. But if we stay in the accounting lane, we miss the more useful question: what are we actually buying when we buy inputs, and how do those inputs translate into output?

Economists use “inputs” in a broader, more operational way. Inputs are the resources that go into production, meaning the creation of services that clients value. In a veterinary context, output isn’t just “a” service/good, it’s a bundle: diagnostics performed, treatments delivered, outcomes improved, reassurance provided, time saved, pain reduced, risk managed, trust maintained. And the core economic question isn’t “what bucket did this cost land in,” it’s “what combination of inputs produces the most value, given constraints, and at what marginal cost?”

So yes, drugs and supplies are inputs. But so are technician hours, doctor time, the ultrasound machine, the practice management system, and the workflow you’ve built (or haven’t built). So is training, scheduling, and the fact that one staff member can make three exam rooms feel possible while another staff member can make three exam rooms feel like a safety violation. Inputs are the ingredients in a production process that can be efficient, fragile, or both.

This is where the economics lens becomes practical. In the simplest terms, production is about how inputs turn into output. If you input more, what happens to output? Usually it rises. But not forever, and not in a straight line. At some point, you hit diminishing returns: the first additional tech hour unlocks throughput; the tenth additional tech hour sits idle because the bottleneck moved to doctor time or room availability or lab turnaround. That idea of diminishing marginal product explains a lot of what practices feel every day but struggle to name. You didn’t “waste money” adding staff. You moved the constraint, and now the next constraint is what determines whether that staff investment pays off.

That’s why “inputs” are almost never independent. They come in combinations, and the combinations matter. Some inputs are complements: they work better together. A new doctor without technician support doesn’t produce like a new doctor with strong technician leverage. A high-end dental unit without trained assistants doesn’t produce like a high-end dental unit with a team that can turn rooms quickly and consistently. Other inputs are substitutes: they can replace each other up to a point. A strong protocol and a better software workflow can substitute for some administrative labor; teletriage can substitute for some low-acuity appointment demand; in-house lab capability can substitute for some send-out time costs and delays. The economic lens forces you to ask: which inputs are complements we should bundle tightly, and which inputs are substitutes we can use to relieve pressure where hiring is hard?

This also reframes the way we talk about “fixed vs variable.” Accounting wants clean categories; economics cares about time horizons. In the short run, some inputs are effectively fixed: your building, your equipment, your core staffing structure, your hours of operation. In the long run, almost everything is adjustable: you can change hours, add rooms, invest in new capability, shift service mix, redesign roles, renegotiate vendor relationships, retrain, or relocate. A lot of practice frustration comes from trying to solve a short-run constraint with long-run tools (or vice versa). If the constraint is doctor time next week, the answer usually isn’t “buy more equipment.” If the constraint is doctor time every week for two years, then the answer might be equipment, workflows, role redesign, and a different staffing model that changes the production function… not just “work harder.”

And this is where COGS comes back in, as a useful reference point. COGS is often treated like the input story, but it’s really just one slice of it: the purchased clinical materials that are directly associated with services sold. Economics widens the frame. If your drug costs went up 8%, that’s an input price shock. The economic question isn’t only “how do I get a better price?” It’s “how sensitive is demand to my price changes, how much can I pass through without losing volume, and can I redesign the service bundle so I use that input more efficiently without reducing quality?” Sometimes the best response to rising input prices is renegotiation. Sometimes it’s protocol standardization. Sometimes it’s inventory management. Sometimes it’s changing the mix of services you emphasize. Sometimes it’s all of the above.

When an input such as labor becomes scarce, its “price” rises (wages, signing bonuses, burnout costs, turnover costs), and practices start substituting where they can: more tech leverage, more automation, more protocol-driven care, more delegation, different appointment structures, and, in some cases, a narrower service offering. This is production economics responding to constraints.

The quiet takeaway here is that many “financial” problems in a practice are actually “production” problems first. If output per unit of constrained input is low, then cost control will feel like trying to bail out a boat without fixing the leak. And the reverse is also true: when production is designed well, cost ratios often improve as a byproduct because you’re getting more output from the same constraint set.

So the next time you see COGS (or any cost line) and feel the urge to treat it like the whole story, try translating it into an inputs question. Which inputs are rising in price, which input is truly scarce in our operation, where is the bottleneck, what are the complements we need to bundle better, what are the substitutes we can use to relieve pressure, and what would we change if we were designing our production process from scratch rather than inheriting it from the last five years of “just keep going”?

In the end, practices don’t compete on whether they “have costs.” Everyone has costs. Practices compete on how intelligently they turn inputs into outcomes clients will pay for, at a marginal cost that leaves room to reinvest, retain staff, and breathe.

People make choices that are consistent with what they want, given the constraints they face. Notice what isn’t in that sentence: “People are always smart.” “People never get emotional.” “People always have perfect information.” “People always choose what’s best for them.” Economics doesn’t require any of that. Rationality is a claim about direction, not perfection. It’s about whether choices respond to incentives in a way that’s predictable enough to model.

This is where the public conversation tends to go sideways, because people hear “rational” and think “cold” or “calculating,” like we’re saying humans behave like calculators. But real preferences are messy, and economics actually makes room for that messiness. People care about convenience, trust, time, certainty, control, and avoiding regret. Clients aren’t just trying to maximize dollars; they’re trying to minimize stress, avoid guilt, protect their identity as a “good owner,” and make a decision they can live with later. Those are all preferences. Economics doesn’t say “ignore that.” Economics says, “fine, put it in the economic model.”

Where things get more nuanced is that people don’t walk around with a spreadsheet in their head ranking every possible option. They use shortcuts. They satisfice. They anchor on what feels familiar. They avoid losses more than they pursue gains. That’s what we call bounded rationality: people are trying to make reasonable choices, but they’re doing it with limited information, limited attention, and limited mental bandwidth. So instead of optimizing, they often aim for “good enough.”

Now here’s the part I want to be direct about, because it matters for the work we do: rationality holds especially well when prices show up, and budgets are binding. Not perfectly, but well enough that the concept keeps winning in real-world situations, including veterinary medicine. The idea that “clients are irrational about price” is usually a translation error. What that phrase often means in practice is, “Clients don’t behave the way I wish they would behave.” But those are not the same statement.

When the cost of care rises relative to a household’s budget, clients don’t just randomly stop caring. They change pathways. They delay the dental. They choose symptom relief instead of diagnostics. They ask for staged workups. They shop around, or they substitute toward other channels, or they wait and see. Sometimes they come in later (and sicker) because the decision felt more difficult at an earlier disease stage. That isn’t indifference. It’s constraint-driven behavior. It’s bounded rationality under stress, and it still follows patterns you can anticipate.

This is also why I’m careful about how we talk about “willingness to pay.” In the exam room, it can be tempting to interpret price sensitivity as a statement about values. It usually isn’t. It’s a statement about constraints. A client can value an outcome deeply and still be unable—or unwilling—to take on the financial risk in that moment. That difference matters because it changes what we do next. If it’s values, we educate. If it’s constraints, we restructure the decision. This is what we mean when we talk about rational consumers making decisions.

Let’s shift from clients to veterinarians. In the February special issue, we discussed a question that keeps coming up in rural and food animal circles: why so many veterinarians have left food animal and rural practice, and why it can feel like the pipeline never quite fills the gap. The lazy explanation is that people “just don’t want to do it anymore.” The more useful explanation is that people respond to the incentive bundle within real constraints. As one dedicated reader of this newsletter pointed out, why did all of the capacity we had in rural and food animal medicine disappear over time? And that is where rationality really plays a role.

A new graduate is not choosing between “rural practice” and “nothing.” They’re choosing among alternative bundles. Rural and food animal practice can be deeply meaningful, but meaning doesn’t erase tradeoffs. Early-career vets weigh debt, schedule predictability, mentorship quality, professional isolation, emergency coverage, travel, physical risk, business uncertainty, and whether the practice model is sustainable without burning out. Those aren’t vibes. Those are constraints. And when that bundle doesn’t clear the bar, people exit. Not because they’re weak, or selfish, or less committed. Because they’re choosing among real alternatives, and the opportunity cost is real. Over time, the people who would normally pursue veterinary school and work in rural areas have opted for more stable and often lucrative careers in urban/suburban areas and in companion animal medicine.

This is exactly why “rationality” is such a helpful lens in workforce discussions. It forces us to stop treating departures as a mystery or a moral failure and start treating them as signals. If rural practice is not retaining people, the market is telling us something about how the bundle is priced—not only in wages, but in time, boundaries, support, and risk. And if we want different outcomes, we don’t get there by scolding preferences. We get there by changing constraints and incentives.

That’s also why debt relief programs, shortage designations, and recruitment campaigns are necessary but not sufficient. Financial incentives can move the needle, but they don’t automatically fix mentorship gaps, coverage models, or professional isolation. If the day-to-day risk remains high, the rational response for many people will still be to choose a path that feels more supported, more predictable, and more sustainable, especially early in their career when confidence is still forming.

So where does that leave us with “rationality” as a concept? It leaves us with a more mature view than either side of the internet argument usually offers. Rationality isn’t a claim that people are perfect. Bounded rationality isn’t a claim that people are random. Behavioral economics isn’t a victory lap over “dumb humans.” It’s all part of the same core economic principle: understanding decisions as preferences plus constraints plus incentives, filtered through psychology and institutions.

And if we keep that framing, two things become easier. First, we stop blaming people (clients, new grads, etc.) for responding to the world as it is. Second, we start designing systems that make better choices easier to make. That’s true in the exam room when we present options in a way that reduces uncertainty and avoids surprise. And it’s true in rural workforce policy when we stop treating “heroic sacrifice” as the default business plan and start building sustainable support structures that reduce risk, improve mentorship, and create real coverage models.

Rationality is a lens. And when the price tag shows up, whether it’s in an estimate for a client or a career decision for a veterinarian, it’s usually the right lens.

That’s why the Covetrus–MWI announcement matters. This $3.5 billion deal rewires part of the animal health distribution and services stack—MWI (under Cencora) merging with private Covetrus, with Cencora retaining a meaningful non-controlling stake in the combined company. (Reuters)

The easy way to cover a merger is to talk about “consolidation”. But I wanted to provide a different view, one that I think is more useful and can help practices self-monitor the situation. A different economic lens to view this merger is to ask what type of integration this is and what that integration changes. While we haven’t yet talked about market structures (it is coming later in the year!), it is important to know that integration of distribution chains has two sides: horizontal integration, which changes the number of options at a given layer, and vertical integration, which changes the friction of switching across layers. Both can matter, even when nobody uses the words “raise prices” out loud.

Start with a simple mental model of the chain. Manufacturers make products. Distributors move them, warehouse them, finance them, and deliver them. Clinics purchase, stock, prescribe, and dispense, layered on top of workflows and platforms that make that whole system usable on a Tuesday afternoon when you’re three appointments behind. Clients arrive at the end of that chain and experience it as one thing: the price on the estimate and the confidence they feel about the recommendation.

Horizontal integration is the “same layer” story. If the distribution layer becomes more concentrated, you can see changes that have nothing to do with an explicit price increase on an invoice. Contract terms can tighten. Tiering can become sharper. Service can be bundled in ways that make it harder for smaller buyers to access the same economics as larger ones. Competition can shift from “who has the best price” to “who has the stickiest relationship.” That’s not automatically good or bad, but it’s a predictable outcome of changing market structure.

Vertical integration is the “stack” story, and it’s the one that I think practices feel most, even if they don’t describe it this way. When distribution is tightly linked with practice-facing services such as ordering platforms, inventory tools, and workflow integrations, the switching decision stops being purely about cents per dose. It becomes about time, disruption, retraining, risk of stockouts, and whether the practice’s daily motion still works. In economics terms, this is where switching costs show up. Not “you can’t leave,” but “leaving is costly enough that you hesitate,” which changes competitive pressure even if multiple vendors exist.

Now layer in the justification you’ll hear from every large merger in logistics-heavy industries: scale and scope. Distribution is built for scale. Warehouses, route density, procurement, credit terms, and inventory management. These are areas where a bigger volume can reduce average cost. Scope matters too: if the same infrastructure can support more product lines and services, the combined entity can spread fixed costs, standardize processes, and simplify transactions. Those efficiencies can be real. The mistake is assuming “efficiency” automatically translates into “lower prices.” Efficiency creates surplus; economics asks who captures it.

That last line is where we want to think as practice owners: clients are getting more price sensitive, and visits are declining. A number of sources have been explicit on this point: veterinarians are reporting increased price sensitivity alongside decreasing visit volume, and they note that veterinary price increases have outpaced general inflation since 2019 (even if the pace has moderated somewhat from peaks).

When clients become more price sensitive, the ability of the system to “pass through” costs downstream becomes weaker. If upstream costs rise (or upstream players gain more pricing power), the downstream reality is that practices have less room to absorb shocks and less room to push them onto consumers without losing volume. When demand becomes more elastic, margin strategies that worked in a less sensitive environment start breaking the quantity side of the business. You can watch it happen in real time: clients decline diagnostics first, delay preventive care, seek substitutes, or ration visits.

This is why the merger matters, even if you never buy a single SKU directly from the combined entity. Integration and scale can change the pattern of terms, bundling, and bargaining across the market. Practices may see more “package economics” where pricing is attached to behavior – think volume commitments, compliance thresholds, platform usage, consolidated purchasing – rather than simple unit prices. For some practices, this can lower effective cost and reduce operational friction. For others, it can widen the gap between “best available pricing” and “pricing that is actually accessible without changing your whole workflow.”

In other words, the headline is scale, but the strategic advantage is coordination. Coordination can be beneficial when it reduces waste. Coordination can also be powerful when it increases stickiness, which is when the practice is effectively choosing a system, not a supplier. The economic lens doesn’t tell you which outcome will dominate in every market, but it does tell you what to watch for.

So, what should practices watch for this year as these two forces play out together? Watch for bundling that quietly shifts negotiating leverage from product pricing to full-stack participation. Watch for tiering that rewards consolidation and penalizes fragmentation, even unintentionally. Watch for deeper platform integration that raises switching costs, because those costs become “hidden incidence.” A cost you pay in disruption and time, even if invoice prices look competitive.

What we’re watching is two sides of the same economic system adjusting at once. Upstream players are trying to win on scale, scope, and coordination. Downstream consumers are signaling tighter constraints by pulling back on visits and becoming more price sensitive. The practices caught in the middle will be the ones who feel both forces through their input costs, their contracting environment, and their ability to translate clinical value into client decisions without breaking demand.

I said yes to the extra call. Yes to the late-night edit, the “can you just take a quick look at this?”, the thing that would only take a few minutes, the thing that was “basically already done,” except it wasn’t.

At times, it felt like hustling. I felt like I was being reliable as the person who gets things across the finish line.

But I started noticing a pattern that always showed up in the background of those yeses: the true cost of the work was almost never visible upfront. The true cost was in the follow-ups, coordination, context-switching, and reworking. There was a hidden responsibility to carry once your name was attached to it; a mental load of “I can’t drop this now.”

At some point, you realize you can be busy, helpful, and respected—while still operating on a razor-thin margin of time, energy, and capacity. That’s where producer surplus comes in; it acts as a reality check.

Producer surplus is defined as the difference between the amount a producer receives for providing a good or service and the minimum amount the producer would be willing to accept to provide it, summed across the quantity sold. In plain language, it’s the cushion between what you’re paid and what it costs—financially and operationally—to deliver that thing. When that cushion exists, supply is sustainable, and when it doesn’t, supply becomes brittle.

Producer surplus gets lumped into a bucket with words like “profit” and “margin,” but in economics, it’s basically “the reason supply shows up.” It’s the breathing room between what it takes to deliver the service and what the market pays for it—enough room that offering the service makes sense to keep doing, day after day. When that breathing room gets thin, the first thing you lose is capacity: fewer slots, fewer add-ons, fewer “yeses,” and eventually, fewer providers willing to keep playing that game.

In veterinary medicine, that cushion funds the unglamorous things that determine whether access to care is real or theoretical. It funds staffing levels, helps clinics pay and retain technicians instead of constantly training replacements, and supports equipment, maintenance, diagnostics, and the overhead of doing good medicine consistently. This creates a buffer for no-shows, bad debt, and the unpredictability that shows up every week. When producer surplus is consistently thin, you lose flexibility, people, capacity, and, eventually, you lose access.

One of the hardest parts of this conversation is that both sides can feel squeezed at the same time. Clients can feel like veterinary care is expensive, and clinics can feel like they’re barely staying afloat. The minimum cost of providing care rises (wages, rent, supplies, insurance, compliance, admin) while household budgets don’t rise smoothly with it. Meanwhile, due to increased uncertainty and friction, the transaction itself has gotten harder. In that environment, everyone feels like they’re losing: clients feel priced out, teams feel exhausted, and owners feel trapped between raising prices and losing trust.

Producer surplus also disappears in ways that are so common we stop naming them. Not all appointments are created equal, but many practices price and schedule them as if they are. Some visits are straightforward, while others are clinically complex, emotionally heavy, and operationally disruptive. When complexity isn’t priced, it’s subsidized by the team’s time and attention. That subsidy leads to rushed deadlines, inconsistent quality, and “profession-typical” burnout that betrays a structural malfunction.

There’s also the silent drain of process friction. No-shows. Under-booked blocks. Over-booked blocks. Rework from unclear discharge instructions. Inventory surprises. Estimate cycles that never convert. Phone tag. Repeated callbacks. None of this looks like a pricing problem, but economically it’s capacity loss, and capacity is the scarce input in most clinics. When you lose capacity, you lose producer surplus even if prices don’t change, because you’re spending the same labor and overhead to deliver fewer completed, paid-for episodes of care.

Bad debt and write-offs are another quiet destroyer. When a clinic provides care but payment doesn’t convert reliably, the practice is discounting after the fact—often in the most stressful way possible. It destabilizes cash flow, adds administrative burden, and forces hard conversations onto teams who didn’t sign up to be collections agents. It also creates a perverse dynamic where the clinic has to price defensively to cover the risk, which can make the client-side experience worse.

All of this is why I’m careful to say what producer surplus is not. It’s not charging whatever you can get away with. It’s not a justification for surprise pricing or sloppy estimates. And it’s not incompatible with access to care. Producer surplus is the condition for supply. If a clinic cannot sustainably provide care, access collapses no matter how strong demand is.

The strategic point is that a healthy system keeps both surpluses alive. Clients need to feel like care is worth it, and practices need enough cushion to supply care consistently. If you squeeze consumer surplus to zero by pushing prices right up to the client’s breaking point, you might win short-run revenue, but you’ll also lose long-run trust, loyalty, and compliance. If you squeeze producer surplus to zero by keeping prices too low or letting operational leaks multiply, you might preserve goodwill, but you’ll also lose capacity, staff, and quality consistency.

This is just as much an issue of economics as it is an issue of long-term sustainability. Producer surplus is the difference between a clinic that is busy, and a clinic that is stable. It’s what makes staffing, capacity, equipment, training, and quality possible. And it’s what quietly determines whether access to veterinary care expands—or contracts—over the next decade.

Anything I purchase over $100 is something that I usually turn into a research project. I compare options, make lists, and read reviews like I’m preparing for a deposition. Once I get something in my head, I get stubborn about finding the “right fit.”

For me, the “right fit” doesn’t just refer to it being the right color or style. It has to fit a unique corner in my living room that makes zero sense on paper, yet is exactly how the space worked in real life. The footprint has to be right so it doesn’t kill the flow of the room. The depth has to be right so it doesn’t look awkward. The lines have to be clean enough that the couch doesn’t visually overwhelm everything else.

And then there’s Sam. The couch had to be the perfect height so that Sam could see out the window to people (and dog) watch. And I do mean the perfect height. Because once you realize your dog has a preferred window-viewing setup, you’re basically negotiating with a tiny landlord who thinks he owns the house.

After weeks of searching, I found it. It checked the boxes: the right dimensions, the right feel, the right look, the right height for Sam’s daily window surveillance. I had already decided what it was worth to me—the price where I’d still feel good about the purchase, even if it stung a little.

The actual price ultimately still came as a shock. When I saw it, I thought, “Who would want to pay that much for a couch?” But I was ultimately exhausted from my search, and it really did check all the boxes. I decided it was worth the price tag.

And let me tell you…it has paid dividends! It has been one of the best purchases I’ve made in a long time, and I get compliments galore… on a couch! The value outweighed my willingness to pay, and to me, that felt like a “win,”

That victorious feeling that you get when you pay less than what something is worth to you is the idea I want to talk about this week. Economists have a formal term for it: consumer surplus.

Consumer surplus is defined as the difference between the maximum amount a person would be willing to pay for a good or service and the amount they actually pay, summed across what they purchase. In other words, it’s the gap between value (as the consumer experiences it) and price. When that gap is positive, people walk away thinking: “That was worth it.” When it’s small, they feel neutral. When it’s negative, they feel regret—and regret is expensive.

Now, let me address something that people often misunderstand about this concept. Consumer surplus is not “money saved.” It can look like money saved when there’s a sale or a discount, but the core idea is not the discount. The core idea is that each of us has an internal value we place on things, based on our preferences, constraints, needs, and emotions, and sometimes the market price sits below that value. When that happens, the purchase generates surplus value for the buyer.

That is why the couch mattered. When I was looking for a couch, I wanted one that solved specific problems in my life and fit in my space in a specific way. The more specific the needs, the more the value depends on them. When I found something that fit my needs unusually well, my willingness to pay for that specific couch was higher than it would have been for any plain ‘ol “a couch.”

This is also why consumer surplus is one of the most important bridges between “pure economics” and real life. People buy goods because they are trying to solve problems, reduce discomfort, avoid risk, and improve their quality of life. When the solution delivers more value than the price suggests, people feel satisfied. They come back, tell their friends, and build trust in the provider. They stop shopping around. That is consumer surplus showing up as behavior.

This applies to veterinary medicine more than almost any other industry, because veterinary care is more than a simple product purchase. It provides specialized services that most people don’t know how to price in their own heads. Alongside those services, pet owners are also paying for reassurance, risk reduction, time, a plan, and relief—both for their pet and for themselves.

Think about how different that is from buying a couch. When I bought my couch, I could see it, touch it, sit on it, measure it, and imagine it in my living room. I could evaluate quality in a direct way. I could also take my time. The stakes were low. No one was suffering while I made my decision.

Veterinary care, on the other hand, typically happens under stress. The guaranteed benefits are frequently invisible (at least at first). The outcomes are uncertain. The person making the decision may be balancing their love for an animal with their fear of making the wrong choice and the reality of a household budget.

This is why it is entirely possible for veterinary medicine to deliver enormous value and still have clients feel like they didn’t get it. Consumer surplus depends on perceived value, and perceived value depends on how well the client can connect what they are paying to what they are getting.

This is where communication and design of the care recommendation matter most. When the plan is framed as a list of line items, clients are forced to evaluate value one line at a time. When the plan is framed as outcomes and decisions, such as “here is what we are trying to learn, here is what it changes, here is what happens if we wait”, clients can actually see the value they are buying. That clarity of communication is an economic input into consumer surplus.

If every client walks out feeling like they paid exactly what it was worth, you might have maximized short-run revenue in some mechanical sense. But the goal is to make clients feel like they got a steal in terms of value. Consumer surplus is part of what makes people feel good about coming back. It is part of what makes them say “yes” again in the future, drives them to refer a friend, and truly believe the practice is on their side.

Consumer surplus is a vital business strategy. When clients say something was “worth it,” they are describing consumer surplus. The role of a veterinarian is to protect that feeling by making value visible, reducing uncertainty, and offering options that fit different constraints. The stress of making a decision when you don’t know what you’re buying is often the most “expensive” part of that process. By reducing that stress, your clients walk away with that same feeling that I had when I purchased my couch: that it was all worth it.

To flip the script on it, let’s think more about the microeconomic side of the issue. This week, we will unpack revenue, profit, and costs in a simple Econ 101 framework. Not in a “let’s turn everyone into accountants” way, but in a way that helps you interpret what you’re seeing in the clinic and make better decisions. Because the goal isn’t to obsess over spreadsheets, though many people think that is what economists do. Instead, completely forget for a minute about what you think those things are from a financial standpoint. The goal this week is to understand why the business sometimes feels out of sync with the workload.

The cleanest place to start is with the simplest definition: revenue is the money that comes in. In a clinic, revenue is mostly the combination of what you charge and how many services you provide. In Econ 101 terms, it’s price times quantity. That’s it. How much you charge, multiplied by how much care you deliver. And this is why revenue can grow for a bunch of different reasons. It can grow because prices increased. It can grow because you saw more appointments. It can grow because you did more high-value services per appointment. It can grow because case mix shifted toward more complex work. Even when the team feels like “nothing changed,” revenue can move just because the composition of the day changed.

But revenue is not the end of the story. Revenue is the top line. The clinic doesn’t keep revenue. The clinic keeps profit. And profit is simply what’s left after costs. Profit equals revenue minus costs. That’s the part that actually allows a clinic to reinvest, raise wages, upgrade equipment, pay down debt, and build a cushion so everything doesn’t feel fragile.

The tricky part is that in day-to-day clinic life, revenue is visible and costs are sneaky. You feel revenue when the schedule is full. You feel it when clients are checking out. You feel it when the day is busy. Costs don’t always “feel” like anything until they suddenly feel like everything. A few extra staff hours here, a little overtime there, a higher drug bill, a lab price increase, a couple of new hires, a change in benefits, a few more no-shows, a growing backlog that creates inefficiency, and before long, the clinic is working harder to stand still.

So, when someone says “we’re doing great because revenue is up,” my brain automatically follows it with the Econ 101 question: what happened to costs? Because profit depends on the gap between those two numbers, and that gap is where business health actually lives. Whenever someone asks me to help with a budget, I always start with “What are your costs?” More than that, it’s important to note that not all costs behave the same way. Specifically, we have two main types: fixed costs and variable costs. Fixed costs are the costs you pay even if you see zero patients today. Rent, insurance, software subscriptions, some equipment payments, and basic utilities. Those costs exist simply because the clinic exists. Variable costs are the costs that rise as you do more work. Drugs, supplies, lab fees, medical waste, credit card processing, and often a big portion of labor. If you see more cases, variable costs go up. If you do more diagnostics, variable costs go up.

And this is where people sometimes get surprised: growth almost always increases costs, too. Revenue going up does not automatically mean profit goes up. It only means you did more of something. Whether that “something” improves profit depends on what it costs to produce it.

How do we then think about costs like an economist when it comes to clinic strategy? The answer is in terms of marginality. Economists love the word “marginal,” but it just means “the next one.” The marginal cost is the cost of producing one more unit of service. The marginal revenue is the revenue you get from producing one more unit of service. In a clinic, this could mean one more appointment, one more dental, one more surgery slot, one more diagnostic panel. And the logic is simple: if the marginal revenue is greater than the marginal cost, that additional unit contributes to profit. If the marginal cost is greater than the marginal revenue, that additional unit makes you busy but not better off. And where we want to get to is where marginal costs equal marginal revenue, as this is what we find is profit-maximizing.

This is why the “we’re slammed” feeling can sometimes be misleading. You can fill the schedule with low-margin work that stretches the team, increases overtime, increases stress, and doesn’t create much profit. Or you can do fewer total appointments with better case flow, better doctor utilization, better technician leverage, and produce stronger margins with less chaos. The goal isn’t to maximize how many things happen in a day. The goal is to maximize value created per unit of constrained time and labor.

And time really is the binding constraint in most clinics. That’s why labor is the dominant cost in veterinary medicine and why the economics of staffing can feel so intense. In many ways, clinics aren’t just selling medical services—they’re selling time, attention, and capacity. If you structure your day in a way that burns that capacity inefficiently, you don’t just lose money. You lose sustainability.

All of this ultimately comes back to price. Price is not only about what clients will pay. It’s also about cost structure. If your costs rise, holding prices flat isn’t “staying competitive.” It’s shrinking your margin. That doesn’t mean every solution is “raise prices,” but it does mean you can’t avoid the underlying math. If the clinic’s costs per unit of service rise, either prices adjust, productivity improves, service mix changes, or profit falls.

Most of the people in this profession didn’t sign up to think about margins. They signed up to help animals and support the humans who love them. But the uncomfortable truth is that healthy economics is what makes that mission sustainable. Profit is not the opposite of care. Profit is what allows the clinic to hire enough people, invest in training, pay a competitive wage, maintain equipment, and keep the doors open in a way that doesn’t require constant sacrifice.

If you want the simplest takeaway from all of this, it’s this: revenue tells you how much activity is happening, profit tells you whether the activity is sustainable, and costs tell you where the pressure really is. Being busy is not the same as being healthy. Growth is not automatically good. And the best clinics aren’t always the ones doing the most—they’re often the ones doing the right work, in the right way, with a cost structure that lets the team breathe.

This isn’t meant to make veterinary medicine feel cold or corporate. It’s meant to make the business side less mysterious. Because when you understand revenue, profit, and costs clearly, you can make decisions that protect the clinic, protect the team, and protect the mission long-term.

“Why don’t new grads want to do rural work anymore?”

I understand why people ask it. When you’re trying to cover emergencies, booked out for weeks, watching producers scramble, carrying the workload of two or three people… It’s hard not to feel like something has changed in the mindset of the next generation.

But after spending the last few years working on rural workforce solutions with the Farm Journal Foundation, I’ve come to a different conclusion: This isn’t primarily a “motivation” problem. And that is exactly what we set out to cover in our latest report coauthored with Dr. Rosslyn Biggs.

The Farm Journal Foundation and I recently wrapped up a report pulling together what we’ve learned after four years of working with students, producers, educators, extension specialists, industry partners, state and federal government agencies, and everything in between. I’m not going to walk through it point-by-point here. Instead, I want to do what we always do in this newsletter: zoom out, put an economics lens on the problem, and talk about what we have learned, dedicating a solid portion of my time trying to find solutions to why rural workforce shortages are so persistent even when everybody agrees they’re real.

The first thing we have to get out of the way is the storyline that this is mostly a motivation issue. I hear it all the time in different forms: “new grads don’t want to work,” “they don’t want the lifestyle,” “they don’t want the hours.” And I get why that’s the instinct. When you’re the one who can’t find coverage, can’t get help, or is carrying the load yourself, it’s hard not to interpret the shortage as a willingness problem. But if you look at this through the lens of incentives, the story changes. People respond to incentives, yes, but more importantly, they respond to incentives inside constraints. And rural practice comes with a very specific bundle of constraints, some obvious, some invisible, that shape what feels possible.

And remember that great article by Dr. Kim Morgan on opportunity costs the other day? Well, that really plays out here. A new graduate isn’t choosing between “rural” and “nothing.” They’re choosing between rural practice and other bundles of work that might come with more predictable hours, more structured mentorship, more peer support, more clarity on what success looks like in year one, and, honestly, fewer unknowns. Rural practice can be incredibly meaningful, but meaning isn’t the only thing people are optimizing for when they’re early in their career and still trying to find their footing. If the early-career years already feel like drinking from a firehose clinically, it makes sense that many people gravitate toward the path that feels more stable and supported.

And this is why I’ve become increasingly convinced that debt is real, but it isn’t the whole story. Debt relief matters. Loan repayment matters. Financial incentives matter. But the rural shortage doesn’t persist simply because people run a math problem on monthly payments and pick the highest number. It persists because the rural “job bundle” includes risk that’s hard to price and hard to explain until you’re living it. The mentorship gaps, professional isolation, long travel and emergency coverage realities, the pressure of being the only option for miles, the uncertainty about boundaries, and the uncertainty about whether the practice model can actually support you long-term aren’t just annoyances. They’re constraints. And constraints have a way of quietly steering decisions even when someone wants to do the right thing and cares deeply about the mission.

Now let’s zoom out to a second concept, because this one is the reason the problem sticks even when we have good people working hard on it: coordination. If you’ve ever spent a significant amount of time in a rural community, you know what I mean. Everyone shows up. Everyone cares. Everyone nods along. Everyone agrees we need to do something different to support the community. Then we all go back to our lanes, and six months later it feels like we’re having the exact same conversation. I’d be lying if I said I wasn’t thinking about my regular interactions with farmers.

This issue isn’t because people are lazy or disorganized. It’s because rural workforce solutions sit in the overlap between universities, practices, producers, state agencies, federal programs, industry partners, associations, and communities. Everyone benefits if the system improves, but no one stakeholder can fix it alone, and no single stakeholder captures the full return on investment when they do invest. That’s the definition of a coordination problem, and it creates a very predictable outcome: lots of activity, scattered wins, and not enough durable change.

This is also why I’m cautious when we put too much weight on champions. Champions are essential. They’re often the reason anything starts at all. But champions burn out. They move. They change jobs. They run out of bandwidth. And when a solution depends on a few heroic people working above and beyond their actual role, it can’t scale, and it can’t survive. The workforce shortage isn’t going to be solved by passion alone. It takes organizational commitment; the kind that shows up as staff time, program structure, budget lines, policy alignment, and real accountability. Individuals spark the work, but institutions are what carry it forward when the spark fades.

When you put these two pieces together—how incentives and constraints shape individual career decisions, and how coordination problems shape collective progress—you get a much clearer picture of why rural shortages persist. It’s not that rural practice isn’t meaningful. It’s that the early-career risk can feel high relative to the alternatives. And it’s not that stakeholders don’t care. It’s that the system is fragmented in ways that make it hard to stack good efforts into something that lasts. Once you see it that way, it changes what you ask. Instead of “what’s wrong with the next generation,” the question becomes “what would make rural practice a sustainable, supported option early in a career?” And instead of launching one more standalone program, the question becomes “how do we align the pieces so the pathway is real, visible, and reliable?”

That’s where I think the Farm Journal Foundation is excelling. They are focused on solutions, and I am excited to continue working with them. The next phase of this work has to live in not diagnosing the problem again, but in lowering the perceived risk for early-career vets and building the kind of coordinated infrastructure that makes rural practice feel normal—not heroic. Because rural veterinary medicine shouldn’t require sacrifice as the business model. It should come with support as the default.

It will take everyone in the profession to continue to support this career alternative. From educators providing a positive view of the career, to communities supporting the practices, to governments at all levels providing the support needed to make it financially viable to support the food systems in rural areas. And more people like you and me constantly working toward solutions to the problem with everyone else in the system. Together we can make a difference.

As a human being, I have a set of choices available to me with a given set of resources (money, working hours, skillset) at any point in time, subject to constraints of the number of hours in a day and the state of technology. Choosing to pursue an Animal Science/Pre-Vet degree meant giving up on a bunch of other things I could have done, like taking on a full-time job, training and showing horses, staying at home, and volunteering in my community. Economic theory tells me a rational economic agent (individual, firm, government) considers all options, ranks them by preference, and then decides if selecting the top choice balances out the cost of giving up the next-best choice. I highlight the next-best to emphasize that the top choice need not beat out all the other choices collectively (after all, you have already ranked them); it must only be easier to give up relative to the next in line.

So, here’s my real-life opportunity cost story. As a late-80s undergrad, advisors were full professors with no time for young “hobby-horsey” women with no farm background who wanted to doctor animals. Rather than telling me how few people could make the grades and how even fewer could earn a spot at the vet school as an out-of-state student, he simply counseled me with these wise words: “If you want to be a vet, go work for a vet.”

Because I dearly wanted to be an equine veterinarian, I stepped away from my undergrad studies and spent a year working for a local large-and-small-animal veterinarian just two years out of school (top of his class!). He also had two kids in diapers and a wife who was “managing” the business side of the practice (which meant I also got to babysit–a lot).

During these twelve months, I learned a few more things about opportunity costs and how they may play out in my future as a veterinarian. One of them was that your staff really appreciate paychecks that don’t bounce. I went back to report to my advisor that while I knew I could be an excellent vet, there was no way I would ever make a profit.

Some of my decisions were motivated by the passage of time, as I was now older and wiser, and new choice sets were available to me. Looking back, I can see that giving up my pursuit of a career as a veterinarian was the next best alternative to what I most wanted. What I most wanted was to help entrepreneurs use economic principles to manage the economic risks facing their businesses so that they, too, could make the best choice (and make payroll).

My favorite part of having the opportunity to write this piece is that I knew my story would resonate, except that you have made/are making the choice to invest in veterinary careers. Wherever this article lands on your timeline, I want to share a few examples of how you, too, can apply the opportunity cost principle to improve your decision-making. We can utilize the concept to help answer a few common questions that might come up in your career:

Why do I want to go to vet school?

The answer to this question is rarely “because I want to run a business.” Seeing people and animals at their worst days (hit by a car, parvovirus, blocked cat) and their best (new Christmas puppy or kitten) requires vets and their team to tap into equal parts training and passion to manage the daily ups and downs of the practice. Every veterinarian has a unique choice set, yet all of them depend on the animal people who choose to invest in veterinary care. Include this fact when making your decisions now and throughout your careers.

What are the choice sets available to me to address financial risk?

I wanted to be an animal doctor to improve the lives of animals. However, as we all know, animals do not make decisions, nor do they pay bills. Using the opportunity cost principle, the decision to attend veterinary college for 4 years foregoes the next-best choice of spending your time and energy working full-time. This cost has short and long-run financial implications, as giving up wages now means giving up investing in retirement and health insurance benefits. The neat thing about economics is that we can assign value to the implicit opportunities of pursuing a veterinary career–e.g., chasing a dream, applying skills to save a dairy faced with an illness outbreak, or working alongside others as a colleague and mentor. Another example is figuring out how to pay for vet school tuition or renting a building to renovate into a new practice. The choice set may include saving up for the expense, securing personal or small business loans, or public or private student loans. Each of these has underlying components such as credit scores, loan type availability, or loan forgiveness programs that determine employers and job locations.

How do I best advise my clientele to apply the opportunity cost principle?

I am guessing that most of you expect me to suggest advising your clients to find a way to pay for the veterinary care that best meets the animals’ needs and ensures their quality of life is maximized. And that this is the path to practicing profitability and earning a livable income. Viewed through our economic lens, these goals are attainable when we step back and walk a mile in the shoes of the client right in front of us. They are facing a set of choices every time they walk in your door–and let’s recognize that many do not walk in your door for a whole other set of choices we need to consider.

For a farm business, the vet bill to save the animal may exceed the animal’s replacement value today, yet the farmer is also considering the time it takes to replace it, the age and productivity of the animal, other farm costs, debt status, etc. The rational farmer is going to decide what they have to give up to get what they want most, and it may just be spending more money on that animal. The principle applies to a small animal owner, who now adds in today’s cost of buying groceries, going to the people doctor, or saving to send their kids to college. In these situations, ask your client to share their choice sets, and then find a way to help them navigate the financial costs associated with your recommended care of their critters now and in the future.

I’d like to close this article with a few words on the relevance of time. Opportunity cost principles apply at a given point in time with a given set of available resources and technology. Wherever you are on your veterinary career path, draw out a timeline for the next ten years, and write down the choices you know you will be facing along the way. Rank them based on what you know now and figure out what alternatives you are willing to give up. Pull this simple pathway out every time you are faced with a big decision, adjust according to new information, and trust your decision-making process.

Kimberly L. Morgan, Ph.D., is an Associate Professor and Greever Endowed Chair of Agribusiness Development at the University of Tennessee, Knoxville, TN. She earned a B.S. in Animal Science and her M.S. and Ph.D. in Food and Resource Economics all at the University of Florida.

What happens when we spend a decade of our lives thinking deeply about one topic? The answer is simple: we become specialized. And we can become more specialized within our field. As I’ve already pointed out, I have specialized in economics, but I am even more specialized in that my expertise falls in the realms of labor, consumer behavior, and entrepreneurship. Similarly, veterinarians can and often do the same. Beyond just becoming a veterinarian, we have those who specialize in species, and even further specialization exists in the form of oncologists, ophthalmologists, internists, surgeons, and so on. What does all of this specialization do in terms of economic realities? It gives each of us a comparative advantage.

Comparative advantage is a concept you usually hear in the context of international trade — countries specializing in what they do best — but it’s not really about countries. It’s about how we decide who should do what. The simplest way to explain comparative advantage is this: even if you’re good at everything, you shouldn’t do everything. That’s not a statement about capability, but rather one about that concept we will talk about next week…opportunity cost! If you spend thirty minutes doing something you’re perfectly capable of doing, but those same thirty minutes could have been spent doing something that only you can do, or something that creates much more value for the clinic and the patient, then you may be “winning” the task while quietly “losing” the day. The trap is that in the moment, it feels efficient. Over time, it becomes one of the most common reasons veterinary teams feel overwhelmed.

A lot of people confuse comparative advantage with being the best at something. That’s a different concept known as absolute advantage. Absolute advantage just means you can do something faster or better than someone else. Comparative advantage is more subtle. It’s not about whether you can do it. It’s about whether you should be the one doing it, given what else needs to happen. This is where the concept becomes incredibly practical, because veterinary medicine is basically one long sequence of small decisions about task allocation and time scarcity.

Think about a veterinarian who can perform a dental cleaning and also handle a complex internal medicine workup. They may be better than anyone else in the building at both tasks. But if that veterinarian spends the morning doing things that could be handled by a technician-led workflow, what gets crowded out? It’s the case review that determines whether diagnostics happen. It’s the hard conversation that turns confusion into trust. It’s the decision-making that prevents a disease from progressing. It’s the medical judgment that can’t be delegated. Comparative advantage is the logic behind protecting doctor time for “doctor-only” work—not because anyone is above anything, but because the opportunity cost of misallocating scarce clinical judgment is enormous.

You can see comparative advantage playing out every time a clinic runs smoothly and the day doesn’t feel like it’s constantly on fire. It’s usually not because demand magically disappeared or because the team suddenly decided to work harder. It’s because the clinic has figured out how to match tasks to roles in a way that keeps high-skill labor from being trapped in low-skill bottlenecks. Technician utilization is one of the clearest examples. When technicians are empowered and supported to fully operate at the top of their training—managing anesthesia monitoring, placing catheters, running labs, taking radiographs, moving dentistry workflows forward—that isn’t just “helping the doctor.” It’s the clinic allocating labor according to comparative advantage. The doctor’s time becomes available for diagnosis, treatment planning, surgery, and communication. The technician’s time becomes a force multiplier. And the entire system becomes more productive without anyone needing to sprint all day.

This is also why two clinics with the same number of doctors and technicians can feel completely different. One will run behind constantly, feel chaotic, and exhaust the team. Another will feel controlled, calmer, and often more financially stable, even when they’re just as busy. It’s easy to attribute that difference to “culture” or “management style,” but a huge portion of it is simply economics in motion. The high-performing clinic is not necessarily doing more work. They’re allocating work more intentionally. They’re building workflows that reduce friction. They’re making sure the most limited resource in the building is not being consumed by tasks that don’t require it.

If you zoom out even further, you can see comparative advantage shaping the veterinary industry as a whole. The growth of urgent care is essentially specialization in high-volume, time-sensitive problems. Specialty referral is specialization in advanced diagnostics and procedures. Teletriage is specialization in decision points that don’t always require a full in-person appointment. Even the constant tension around pharmacy channels and where clients buy products fits into this same theme: the market keeps reorganizing tasks and services toward whoever can deliver them most efficiently, conveniently, and reliably. Sometimes that shift feels uncomfortable. Sometimes it creates real challenges for general practice. But it’s still the same economic force: systems allocate activity toward comparative advantage.

If you want a single question to keep in your back pocket after reading this, it’s this: Is this the best use of my time, given what I’m giving up by doing it? That question works for veterinarians, technicians, managers, and even policymakers. It works inside a single clinic, across a region, and across the entire industry. And once you start asking it consistently, a lot of things become clearer. Not just what’s inefficient, but what’s unsustainable, what’s creating hidden strain, and where the biggest opportunities are to make the same resources go further.

Comparative advantage isn’t just about trade theory from a textbook. In veterinary medicine, it’s one of the most practical ways to think about workflow, burnout, capacity, and why access problems persist even when everyone is working as hard as they can. It’s the economics of doing the right work with the right people at the right time. And honestly, that might be one of the best definitions of a functional clinic (and a functional veterinary system) that I can think of.

What does this have to do with economics? When we talked about equilibrium, we learned that the point where supply and demand meet is always moving. But how does it move? It has to do with factors that shift supply and demand to different levels. This is where we really start to get to reality. We talk about supply and demand like it’s a clean little diagram in Econ 101, but in veterinary medicine, it isn’t a diagram. It’s the lived reality of access, staffing, case flow, and the pressure everyone feels trying to keep care moving while staying human. This isn’t the same as simply changing prices up and down; it involves the underlying forces that shift the whole market, even when the posted prices haven’t changed.

If the price of a service changes and clients respond by doing more or less of it, that’s not a “shift.” That’s just movement along demand. But a shifter changes how much people want at every price, or how much clinics can provide at every price. Shifters are the reasons why your schedule can feel dramatically different from one year to the next, even when you didn’t intentionally change anything.

Let’s start with demand. One of the biggest demand shifters is income. In economics, most goods are “normal goods,” meaning that as people have more disposable income, they tend to buy more of them. Veterinary care often behaves that way. When households feel stable, they’re more likely to keep appointments rather than reschedule, they’re more comfortable moving forward with diagnostics, and preventive care compliance improves. It’s not that I suddenly love spending money on veterinary care— it’s that the decision becomes less stressful. There’s more room to do the full plan instead of only the minimum.

But here’s where care gets interesting: not all veterinary services or products behave the same way. When budgets tighten, people don’t stop caring about their pets. What they often do is change the pathway they take to care. They delay the dental. They skip the recheck. They choose symptom relief rather than diagnostics. They rely on advice from friends or the internet just long enough to see if it resolves on its own. They look for lower-cost access points. In economic terms, those “alternative pathways” aren’t necessarily bad, but people use them more when finances are constrained, and less when they feel confident again.

At the other end of the spectrum are luxury services. Luxury doesn’t mean unnecessary; it just means demand grows disproportionately as incomes rise and financial confidence improves. Specialty referrals, advanced imaging, orthopedic work, oncology, and more intensive chronic care management often live in this category. What’s so important here is that this demand doesn’t just respond to income — it responds to expectations. When clients feel optimistic about their financial situation, they’re more willing to take on larger care decisions. When they feel uncertain, even high-income households can become cautious, and big-ticket care becomes more difficult to move forward with.

Another powerful demand shifter is the price of related goods and services — substitutes and complements. Substitutes are alternatives that clients can choose instead of your service. In veterinary medicine, this shows up in all kinds of ways: urgent care replacing a primary care visit, teletriage replacing an in-person appointment for certain cases, online pharmacies replacing in-clinic dispensing, and even “wait and see” replacing diagnostics. When substitutes become cheaper or easier, demand for traditional clinic services can soften. When substitutes become more expensive, less convenient, or less available, demand flows back into general practice. This is one reason clinics can feel whiplash when a local urgent care opens, closes, or changes hours. It’s also why the pharmacy channel has become such a major storyline: the client isn’t only deciding whether to treat, they’re deciding where to purchase, how quickly they want it, and what price they consider “reasonable.”

Complements are goods that get used together, and vet care has plenty of them. Most routine services are likely complements. If the cost of vaccines increases, then people are less likely to do the health screening or purchases of parasiticides. Boarding and daycare are complements, because they trigger vaccine requirements and health documentation.

Then there’s the “other” category — tastes, preferences, trends, and the cultural meaning of pets. This is one of the most important drivers of long-run veterinary demand, and it’s easy to underestimate because it doesn’t show up as a single variable. Over time, we’ve seen a massive shift toward pets as family members, higher expectations for pain management and quality of life, stronger preventive mindsets, and more openness to addressing behavior and chronic conditions. These changes don’t just increase demand — they change what people expect the experience to be. More communication. More convenience. More certainty. More empathy. That shift is real, and it has reshaped the demand side of the market even when the economy is choppy.

Seasonality and expectations also matter. Parasite seasons matter. Summer travel matters. Holidays matter. But expectations might matter even more. When clients believe things are going to get harder financially, they delay care. Those expectation shifts show up as lower acceptance rates, cancellations, “what’s the minimum we can do today” conversations, and changes in how frequently clients ask about prices upfront.

Now, let’s think about supply. In many markets, veterinary supply is steep in the short run — meaning you can’t quickly create more capacity even if demand is strong. Clinic output isn’t just “how many people want appointments.” It’s constrained by doctor hours, technician availability, support staff, room capacity, and the workflow reality of the day. When staffing tightens, when burnout rises, when hours are reduced, or when clinics stop taking new clients, supply shifts left even if demand stays the same.

And here’s the part Econ 101 doesn’t fully prepare you for: when supply can’t expand, markets don’t always clear through price alone. They clear through access. Wait times rise. Appointment availability shrinks. Triage gets tighter. Teams run closer to the edge. In that environment, the “price” clients experience isn’t just dollars, it’s availability and time. That’s why veterinary inflation conversations sometimes miss what’s really happening: the industry isn’t only adjusting through higher prices, it’s adjusting through a scarcity of appointment slots in many local markets.

Supply is also shaped by costs. Wages, drugs, inventory, lab fees, rent, utilities, and financing costs all matter. When the cost of producing care rises quickly, clinics have to adjust something. Sometimes it’s the posted price. Sometimes it’s the service mix. Sometimes it’s the appointment structure. Sometimes it’s staffing models. And increasingly, productivity improvements have become their own supply shifter. Better scheduling systems, stronger delegation, tighter refill workflows, smarter technician utilization, and more efficient use of in-house diagnostics can effectively shift supply outward. This isn’t necessarily done by finding more veterinarians overnight, but by making the hours you do have count more.

Regulation plays a role too, even if it’s not always visible day to day. Scope of practice rules, telehealth/VCPR constraints, and cross-state licensing frictions all shape what can be delivered, by whom, and under what circumstances. It’s entirely possible to have demand and willingness to pay, and still be constrained by what’s legally or operationally feasible.

So, what does this mean in practice? It means that the next time the clinic feels “off,” the right question isn’t simply “did we raise prices too much?” or “are clients getting cheaper?” The better question is: are we dealing with a demand shift, a supply shift, or both? Because the solution depends on the diagnosis. If demand is shifting, you’ll usually see it in acceptance behavior, cancellations, channel choices, and the mix of cases walking through the door. If supply is shifting, you’ll see it in appointment lead times, staffing strain, bottlenecks, and how hard it feels to fit anything else into the week.

Supply and demand shifters are the forces behind why your schedule looks the way it does, why access might feel tight even when prices are stable, and why client behavior can change quickly without anyone “doing anything wrong.” The more clearly we can spot the shifters (income pressure, substitutes like urgent care and online pharmacy, changing expectations, staffing constraints, rising input costs), the more we can respond with strategy instead of stress. And honestly, that’s the difference between feeling like you’re reacting to the market and feeling like you’re leading through it.

Some quick reminders:

• Supply slopes upward. As the price of a good/service increases, the more we want to produce. And when we aggregate everyone’s willingness to supply, we get a curve at different prices. This looks like this on a graph –

where the vertical y-axis is the price and the horizontal x-axis is quantity.

• Demand slopes downward. As the price of a good/service increases, the less we want to buy. And when we aggregate everyone’s willingness to pay, we get a curve at different prices. This looks like this on a graph—

—again, where the vertical y-axis is the price and the horizontal x-axis is quantity.

So where does equilibrium come in? It is when we plot both supply and demand on the same graph, like so:

The point where they intersect is what we call equilibrium. Now remember, this is a simplification of the process. Supply and demand curves are rarely linear in reality, and the process of finding the equilibrium is much more complicated. This also only represents the intersection of both curves at a single point in time. The world doesn’t stop, so the equilibrium point can shift (literally) from one second to the next, as it does on the stock market or other high-volume goods.

Under neo-classical assumptions, it is believed that the market is always moving toward equilibrium in the long term, though this may be untrue at a specific point in time. The long-term equilibrium hypothesis is due to the idea that people—on both sides of the market—respond to incentives. In addition, many outside forces can shift where the equilibrium (or degree of disequilibrium) is located.

It is important to understand whether those shifts are temporary or structural. If temporary, incentives are usually enough to bring the market back into order, given enough time. If it is structural, then a new long-term equilibrium can occur and requires a re-evaluation of the market. There are several things we can do to understand if a change is temporary or structural, but that is only done with certainty in hindsight.

So, how do we think about this in veterinary medicine? Let’s frame it from the viewpoint of veterinarian labor across the United States. The market supply curve would be the sum of all the individual veterinarians willing to supply a specific number of hours at different wage rates. The market demand would be the sum of all practices willing to pay for some number of total hours of labor. The more expensive the labor, the fewer total veterinarians all practices will want to purchase if it doesn’t sufficiently increase revenue to maintain an equal or higher level of profit. The higher the wage veterinarians can earn, the more total hours they are willing to supply within the market. At some point, these two aspects meet. This is where we find the equilibrium number of hours supplied across the veterinarians, and the wage rate per hour that practices will pay.

What does all this mean? It means that there is some theoretical level of hours existing at a particular wage rate that the market for veterinarians is always working toward. Different events can change how the market operates temporarily, like the COVID-19 pandemic or the Great Financial Crisis/Great Recession. Other aspects are more structural, like increases in home ownership that lead to increases in pet ownership or a shift in the human-animal bond.

We care about this theoretical equilibrium because, if it becomes unbalanced, one group—either veterinarians or animal owners—is worse off. Equilibrium occurs when both sides are the market at the best possible outcome jointly. While the equilibrium can shift for a different optimal outcome, moving along the current supply or demand curve away from the equilibrium creates this imbalance. Animals will suffer, or veterinary teams will be underpaid for their services.

I find that this dichotomy of worries is the core of much debate in the industry, especially over the past 5-7 years. The industry is (rightly) concerned about the need to provide healthcare access to as many animals as possible. But this is still a market, and I would argue that we consider how to do that sustainably for the people who provide those services. I personally want them to be financially well off. Adding unnecessary amounts of labor to the market could be detrimental to wages. But what is too much labor? This is the tricky part that no one likes to acknowledge. Adding more labor only means more hours are available; it doesn’t mean that demand will meet that new supply.

Recently, I’ve started taking courses on wine tasting and tracking my tasting notes for wine, tea, and a variety of other foods. I find it fascinating because everyone wants something different and our preferences can eventually aggregate to something meaningful enough to observe in a market. All of those wants aggregate to what we call demand. Much like supply, we as consumers each want and “demand” certain goods/services in certain amounts. How much we demand depends on the price at which it is offered.

Demand is one of those topics that often gets simplified to, “What are people buying?” In reality, the concept has much more depth and nuance. Demand begins with our individual preferences. What do we like? What do we dislike? What things are basically equal to each other? We have to know ourselves before we can know what to buy later.

That sounds like a lot of decision-making when it comes down to it! Luckily, our brains have some built-in ways to help make all of those decisions in real time. We often use automatic processes and arbitrary ‘feelings’—or vibes, as the kids say—to make decisions. Think about your favorite food. When it touches your tongue, how does that make you feel? For me, it is almost a sense of euphoria. What happens when you taste a food you absolutely hate? You immediately want to spit it out. Now think about the range of all the other foods that are between those two extremes. Your taste buds could probably do a decent job at helping you rank the hundreds of other foods/flavors with one or two bites. This is how we think about demand. We want to be able to say that we prefer one thing over another. If we can’t say that, then we end up with decision paralysis. Once we can rank goods/services, then we can better understand how much we want to buy of each one.

So, you want to buy a car. Great, what make? Model? Color? Features? Can you live without a Bluetooth phone connection? What type of fuel do you want? Maybe this is just me dreading having to purchase a new vehicle in the not-too-distant future, but I am glad that I only need one vehicle for my household. When it comes to an entire industry, we have to aggregate that out to how many cars does the average household want to buy? How do we look across all of the options and say “the demand for sedans is X, while the demand for SUVs is Y”?

Just like supply, we have to take each person’s individual preferences and add them together. It is imperative to remember that the price we have offered to us is important. I may want two vehicles, but at the price point of $30,000 each, I only demand one. Our wants can be unlimited, but our willingness to pay and our ability to pay are not.

One thing that makes demand different from supply is that we generally don’t want to pay higher prices for goods/services. The higher the price, the less we as individuals and as a population tend to want/demand. This is key for next week’s topic, so don’t forget it. Who wants to pay more for a good of the same quality, size, etc. (holding everything you can think of constant), if you can get the exact same item cheaper? Note: I am not talking about things that are for status or power, just everyday things like food or healthcare or gas for our cars. Almost no one wants to pay more for those things. This is because people are mostly rational when it comes to how prices work. This is a key part of demand that continues to be proven over and over again in the real world, and it is why this theoretical point is important.

How does this apply to veterinary medicine? I hope it is relatively clear where I’m headed here, but just in case: it is all about the demand for services. To make it simple, let’s just consider routine care for a non-senior adult pet that is healthy. We have to start with what a pet owner’s preferences are for purchasing routine services. Do they even want to go to a veterinary practice to receive care? This is a very blunt way of saying that, under the current reality in the U.S., it is not a requirement of pet owners to seek routine veterinary care. Then, we have to consider their preferences about various tests (blood, fecal, etc.). Do they want to protect against fleas, ticks, and heartworms? What about vaccines? Do they want a kennel cough vaccine? What about rabies? Each of these decisions has to be made, and it isn’t as easy as the automatic processes that happen when we choose foods. It is much trickier. Then comes the price of each of those services, and that’s without factoring in the cost of the visit itself just to have the pet seen by the team.

We often think that being a pet owner should be simple. We care about these living things, and I would argue that most people truly want their pet to live a happy and healthy life. But making those decisions about what routine services to purchase requires blind trust in the veterinary team or a deep level of knowledge about what fits best for a specific pet. Because routine veterinary care really is not about one service, but about the bundle of services needed to maintain a healthy pet. It is difficult for many pet owners to understand why they should want to purchase each of those services. And then they look at the price of each item, which then “adds up” to the total cost for the routine care. This is not to say that I don’t think routine care (and really all veterinary care) is important. In fact, just the opposite! My point here is to impress upon everyone that veterinary care, especially for pets, is not a simple choice. It is complicated by emotions, preferences, and owners’ constraints on knowledge and money.

This is only one side of one market within the industry. We still need to consider supply, how it interacts with demand (getting into that next week), how other aspects spill over into the market for veterinary care, and so on and so on. I would like us to move away from saying “as a pet owner it is your responsibility to seek veterinary care” and start to think about the issue more systematically/holistically. The demand for care is a function of all of those preferences. When we aggregate every individual pet owner’s demand for care, we can better see the larger picture/market. But it is each individual who also has to make those decisions every day.

Demand is the concept that connects the people of veterinary medicine more than anything else. As much as we want to provide the best veterinary care to all of the animals, we must first demand that we meet people where they are as humans.

I’m sure you are familiar with economists always emphasizing markets, prices, and incentives, but those mechanisms do not operate in isolation. They are embedded in institutions such as laws, courts, contracts, and enforcement mechanisms. Alongside these formal institutions sit informal ones—norms, expectations, and social understandings that guide our behavior even when no legal rule is present. Long before legislatures became involved, many people already treated pets as family members rather than interchangeable property. This has largely been driven by the hypothesized increase in the human-animal bond. That informal institutional reality has shaped behavior, influencing how households allocate time, money, and care to animals regardless of what the law technically says.

Legal rules that classify pets as ordinary property have begun to conflict with social norms that assign them ongoing emotional and caregiving value. In economic terms, this mismatch increases the likelihood of inefficient outcomes, particularly in high-stress situations like divorce. The Pennsylvania proposal can be understood as an attempt to narrow the gap between formal legal rules and the informal institutions that already govern how people think about and care for companion animals.

Under the old institutional framework, pets were treated as ordinary marital property. In economic terms, this had the virtue of clarity. Property rights were simple, well-defined, and relatively easy to administer. A dog was legally indistinguishable from a sofa or a television. That simplicity reduced administrative costs, but it also ignored how people may actually value pets. Companion animals generate substantial emotional attachment, companionship, and routine care obligations that persist long after a divorce decree is issued. When institutions fail to reflect underlying preferences, the result is often inefficient allocation rather than neutrality.

The new legal framework keeps pets within the category of property, but conditions that status on additional factors such as caregiving history and responsibility for ongoing care. From an institutional economics perspective, this is not sentimentality; it is an attempt to better align formal rules with real economic behavior. By modifying the legal classification, the state alters the incentive structure facing divorcing couples. Bargaining over pets is no longer a purely mechanical exercise, but one shaped by expectations about how courts will evaluate care, responsibility, and welfare.

This is where transaction costs matter. Transaction costs are the expenses and efforts beyond the price of an item, encompassing all costs of making an economic exchange, from finding information (search costs) and negotiating to writing/enforcing contracts (legal/monitoring costs) and transferring the good. Broadly, they include time, inconvenience, fees (brokerage, legal, bank), and the costs of ensuring agreements are kept, explaining why firms exist and why some activities are internalized rather than outsourced. If bargaining were frictionless, couples could negotiate efficient pet arrangements regardless of the legal rule. In practice, some divorces involve high emotional, informational, and legal costs. The existence of this legislation implicitly acknowledges that private bargaining often fails in this context. The institutional response is to accept higher decision costs upfront in exchange for outcomes that more closely match underlying preferences and reduce long-run conflict. That is a classic institutional tradeoff rather than a moral statement.

The relevance to the veterinary industry lies in how this institutional shift reframes pets as long-lived economic commitments rather than static assets. Veterinary care, preventive medicine, chronic disease management, and end-of-life decisions all depend on stable caregiving arrangements and predictable responsibility for costs. When the law signals that courts will consider caregiving history and ongoing obligations, it strengthens incentives for owners to formalize care responsibilities and plan for long-term veterinary expenses. This can affect demand for veterinary services, pet insurance uptake, and willingness to invest in preventive care, particularly in households experiencing instability. In short, changes in family law can indirectly influence how veterinary services are valued, financed, and consumed.

There is also a broader lesson here about institutions filling gaps where markets struggle. Pets do not have clear market prices that reflect their full value, yet they require continuous investment in health and welfare. When prices fail to capture that value, legal and social institutions step in to structure allocation and responsibility. Courts, contracts, and legal categories become substitutes for market signals. That substitution is imperfect, but it is often unavoidable.

This is why seemingly small legal changes deserve economic attention. Just as competition policy shapes how veterinary markets operate and information environments shape vaccine uptake, family law shapes the incentives surrounding pet ownership and care. Institutions do not merely respond to economic behavior; they actively shape it. Ignoring that relationship leads to an incomplete understanding of how the veterinary sector functions in practice.

The Pennsylvania case is not about predicting a surge in pet custody litigation. It is about recognizing that economic outcomes depend on rules as much as preferences. For veterinarians, practice owners, and policymakers, the takeaway is straightforward: markets matter, but institutions quietly determine how those markets, and the non-market relationships around them, actually work. What this law leads to is a potentially better outcome for pets and people. Which, I think we can all agree, is the ultimate goal.

Where taxes fit in among the policies is the broad category of fiscal policy. Last month, we explored the basics of monetary policy when we discussed interest rates. Fiscal policy works hand in hand with monetary policy to help control inflation, manage unemployment, and promote economic growth. It is also used to help better allocate all the resources at the government’s disposal. However, it is often simplified to mean taxes and spending. This is where people like to say they are “fiscally conservative,” which is only one side of the policy coin.

So, let’s dig into what the definition actually is: the government’s strategic use of spending and taxation to influence the economy, aiming to stabilize growth, manage employment, control inflation, and redistribute wealth, primarily by adjusting aggregate demand. While we haven’t touched on what exactly demand is yet (that’s next week’s newsletter!), for now we can consider it the things ‘we the people’ in our economy want to purchase with our money.

When it comes to spending, we are talking about where the government spends its money, which is generated through our taxes. The largest amount of spending goes to things like public services, infrastructure, defense, and transfer payments on the federal level. States and smaller municipalities also have their priorities, which often reflect similar areas of spending.

There are a lot of different types of taxes that can be employed: sales tax, income tax, property tax, tariffs, etc. There could be a whole post about these, and it is often treated as a higher-level topic in most economics degree programs. What is important for this post is that taxes shift in terms of how much the government (local, state, and/or federal) expects to need in order to spend on the projects. How taxes are structured, progressive vs. regressive vs. flat tax, is another topic and one that is often the center of political debate. I’ll come back to that in another newsletter. The key here is to understand what fiscal policy is so that we can react to it appropriately in our own lives and businesses.

Putting both spending and taxation together, we get fiscal policy. When the government wants to stimulate growth using both policy instruments to help with it, it can either lower taxes, thereby keeping more money in the pockets of businesses and consumers, or it can increase spending to help invest in various parts of the economy. If the goal is to slow economic growth, which we sometimes do in order to tame inflation, then the government can raise taxes or lower its spending.

As we have previously established, the goal of any government is typically to have steady long-term growth. If the economy grows too quickly, demand for the aggregate stock of goods and services outpace supply, which leads to inflation. If the economy is too sluggish, then there is too much slack and more workers get discouraged, and the spiral of a stagnant economy can arise. It is a balancing act, which is why fiscal and monetary policy both exist.

What happens if we have the two mechanisms working in opposite directions (spending increasing but taxes also increasing or vice versa)? This is where things get tricky, and it is all about magnitude. If we look over the course of history in the U.S., this happens quite a bit across both sides of the political aisle. There is a lot of uncertainty and “it depends” that happens, given all of the other policy tools at play.

What does all of this mean for veterinary medicine? As always, it affects both the practice and the client. From the client’s perspective, taxes affect how much disposable income is available to spend on veterinary care. Similarly, government spending will also affect whether additional economic activity is happening through investment or transfer payments. Governments can also spend money to subsidize services or products. When this happens, people tend to have more or less money to spend.

From a practice perspective, changes in taxes lead to changes in the cost of providing goods and services, which then lead to changes in prices and/or profit margins. Similarly, how much the government is spending on things like infrastructure can impact the ability of people to access a practice. Government spending could also subsidize upstream costs in a way that makes operating cheaper. Much of the time, the amount of government spending amplifies through different sectors of the economy and has spillover effects (intended or not).

While there isn’t much an individual can do to affect what type of fiscal policy gets enacted—except by voting for officials that take particular stances on such things—there are ways to react to what is happening that are beneficial for business and clients.

I’m not a tax professional, so I will start by saying you should always be proactive in talking with one. But in terms of a business, being agile through diversification, building adequate cash reserves, and leveraging technology in ways that keep things moving along efficiently are great places to start. You should always assess how much of a cost increase your business can handle, both at current prices and at different prices. When times are good, are you able to get more clients in the door? How can you offer deals when times are a bit more constricted?

In the end, the principles are the same whether the economy is booming or in a rut: be proactive about finances, plan for the unforeseen, and manage your debt and expenses wisely. There are professionals who can and will help you with this, and they are usually worth more than you will pay them. I think some of those professionals are readers of this newsletter as well! If you are, let everyone know in the comments so they know how to find you.

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First and foremost, Happy New Year from the VetEconomics Weekly Team! We are looking forward to continuing our conversations with you all on everything economics throughout 2026. Our New Year’s resolution is to keep growing our subscriber base and bring you more timely information as the economy and world start another revolution around the Sun.

Now, back to business. I’m sure you have seen at least one news article in the last month talking about jobs. Likely, you saw something about unemployment starting to rise across the economy… and the various opinions about what that means and, possibly, how it is measured. Unemployment is one of those concepts in economics that sounds straightforward, but in reality is more complex, even if we just scratch the surface of the idea.

The standard definition of unemployment is: the share of the labor force that is without work but available for and seeking employment. So, I want to work, I am looking for work, but I am not currently employed (either by someone else or self-employed). Well, why do I need to write anymore? That sounds straightforward enough. I can just end this week’s newsletter here, right? If only that were the case.

What makes unemployment more complex than someone who is simply out of work? It comes down to the definition. The current estimate of the number of adults (18+ years of age) in the United States is 267 million. But not all of them are able to work a job. Those who are institutionalized, incarcerated, under 16, active military personnel, retirees, full-time students, or stay-at-home parents not seeking employment, etc., are not included in any civilian labor estimates. Yet, this doesn’t automatically lead us to the number of people in what we call the civilian labor force.

After we take out all of those people and those who may be able to work but are not working and not seeking employment of any kind (those we call discouraged workers), we are left with about 171 million adults – a 96-million-person difference. This is what we call the labor force. When we divide the number of people in the labor force by those who are of working age but able to work (so still excluding those who are institutionalized, under 16, etc.), we get the labor force participation rate.

Why am I explaining this all to you? Because we have to figure out all of this before we can even begin to understand how we truly define unemployment. When we say someone is unemployed, we still consider them in the labor force. But what makes them different from someone who is a discouraged worker? For unemployed persons, we can refine our earlier definition a bit more: People without jobs who have actively looked for work in the past four weeks and are available to work.

Okay, that was a lot of words and definitions. Let’s break this down in graphical form:

Working age population → Labor force → Unemployment

Hopefully that was a bit of a palate cleanser… because we have different ways to calculate unemployment rates! Quick reminder that a “rate” is a percentage, which in this case is the share of people not currently working but looking for work. How can we have different ways to measure the rate of employment? All of those calculations we did to remove certain people from the labor force are where the differences come in – they are how we define both the numerator and denominator in our rate calculation.

In fact, the U.S. Bureau of Labor Statistics has 6 different measures of unemployment. Each one provides a different picture of the labor market for the country. Here are the 6 different measures:

1. U-1: Long-term unemployed (15+ weeks).

2. U-2: Job losers, job leavers, and those re-entering the labor force.

3. U-3 (Official Unemployment Rate): The most commonly cited figure. It counts people who are jobless, actively looking for work in the past four weeks, and available to work, divided by the civilian labor force. This is the one we discussed earlier.

4. U-4: U-3 plus discouraged workers (those who believe no jobs are available for them).

5. U-5: U-4 plus other marginally attached workers.

6. U-6 (Broadest Measure): This includes everyone in U-3, plus those working part-time for economic reasons (wanting full-time but can’t find it) and “marginally attached” workers (wanting work but stopped looking recently).

So why does this matter for veterinary medicine? It matters from two perspectives. First, just like every other industry, veterinary medicine has to consider unemployment from a business perspective. How many veterinarians, veterinary technicians, veterinary assistants, etc., are unemployed but looking for work? How many are discouraged and no longer in the labor force? How many are working part-time but want to work full-time?

These are actually quite hard to pin down for the industry because we have no centralized data collection agency. In the past, the AVMA has put out some numbers related to unemployment and found that it was low over the past several years, but this is based on limited survey data and is biased by those who are AVMA members and respond to the survey. BUT some measure is better than no measure, in my opinion, for this particular topic.

The other perspective to consider on unemployment from a country perspective is that it will affect (1) the number of people who own pets, and (2) the number of people who will seek veterinary care. When unemployment rises, money gets tight, and people must make decisions about where they need and want to spend their money. Unfortunately, that means pets often are lower on the hierarchy.

Unemployment is not a choice for most people. They get laid off, their skillset is a mismatch with available jobs, and they can become discouraged if finding a new job is taking longer than expected. One interesting note: the labor force participation rate—the share of people who are eligible to work and are either employed or actively looking for work—has been declining over the long term. This is partly due to an aging population, but it is also reflective of the reality that the number of discouraged workers in the economy has been growing. This can cause unemployment rates to “look” better than they are. If unemployment rates are low but there are fewer people actively looking for work or who are employed (in the labor force,) then we are actually in a worse position than if we had a high percentage of unemployment with a high percentage of people in the labor force.

Why do we care about unemployment metrics? As with most things, it is one signal (of many) of the economic health of an industry or the broader economy. When we combine this with other indicators like GDP, interest rates, and inflation, we can better contextualize how the population is coping with current economic conditions. We then want to know why unemployment is rising or falling and if there should be a policy intervention.

Over the past several years, the economy has been “running hot” and growing. But this is unsustainable given the rate of inflation. There is a cycle to the economy, and this is just a temporary period in which unemployment is rising as the economy is likely cooling off. As we discussed last month, the Federal Reserve wants steady growth in the long term. Using unemployment as a metric helps them know when to change direction on the different policy levers at their disposal. But it is always important to realize that within the veterinary sector, unemployment is harder to measure.

One of the few consistent metrics out there is the VMG Veterinary Workforce Barometer, but this is specific to their membership and not the much larger veterinary industry. If we want to change the veterinary industry for the better, we need the data to support future decisions that is public, well-supported, well-designed, well-maintained, and objective. This is where we can employ a workforce for a better future.

Powell has had the difficult task of handling monetary policy for the United States since 2017, but this year has been especially difficult given the need to balance both inflation and unemployment woes. What has further complicated efforts in the past few months is the lack of data now coming out of the various agencies of the federal government. Without proper data, any policy levers Powell has to direct the economy are based on “vibes” (as the kids these days like to say). But don’t let all this deter you from celebrating the New Year!

We have thrown a lot of words around just now, like “monetary policy”, “interest rates”, and the “Federal Reserve”. But what are all these things? Intuitively, we can kind of guess, but let’s not take that as a given. The point of this newsletter is to give us all a common basic knowledge of these things to better understand the world around us. So, let’s dig into each of those aspects and what they all mean for the animal health industry.

Monetary policy. The big nebulous thing that everyone likes to talk about (along with fiscal policy, which we will cover in a later newsletter). A formal definition of such policies is the actions taken by a country’s central bank to manage the money supply and credit conditions to achieve macroeconomic goals, primarily controlling inflation and promoting economic growth. The money supply is the total stock of money in an economy, including physical currency (notes and coins) and liquid assets like bank deposits.

We will revisit money supply later, but here I want to talk about credit - the ability to borrow money or goods/services, with the promise to repay later, often with interest. This is where those interest rates from the Federal Reserve enter the equation. The Federal Reserve is the United States’s central bank, and it sets the interest rate at which other banks, which are backed by the government (via the Federal Deposit Insurance Corporation or FDIC), can borrow money at. From there, a market ensues where banks then offer interest rates to customers. The lower the Federal Reserve interest rate, the lower the rate offered on the market. Those market interest rates are then what we are offered when buying a house, car, getting a personal loan, etc.

Why does the Federal Reserve change the rate of interest at the federal level as part of its monetary policy? Quite a bit of research has been done on the ways to tackle inflation when it grows beyond target levels and how to support the job market when unemployment increases. Last week, we discussed the connection between inflation and wages. When wages rise, people can afford more goods and services, which leads to inflation. If inflation rises too quickly, then it is important to slow that growth, which can be done by raising interest rates. Borrowing money becomes more expensive, and it slows the rate at which businesses expand and how much individuals can borrow. Conversely, if economic activity is a bit sluggish, then interest rates are lowered.

This typically stimulates the rate at which businesses borrow and, in turn, hire more people and decrease unemployment. This also encourages individuals to borrow money. Again, this is just one of the policy levers the Federal Reserve can use to help the economy move along. While there are ups and downs, referred to as the business cycle, the goal is to keep the economy growing at a steady rate rather than having large swings one way or the other.

What does this mean for veterinary business and clients? When the economy is running “hot” and growing rapidly, the Federal Reserve is likely to increase interest rates. It is a good time to borrow money before that happens if you need it for capital improvements. Clients may also have more disposable income at this time, so they are more likely to come through the door. During these phases, keep an eye on what interest rates are doing. Be sure to plan for tighter times, but take advantage of the increased revenues.

In terms of labor, unemployment within your business and in the broader economy also needs to be considered. Building up a reserve to support your staff during good times is vital. Without sustainable worker employment in the broader economy, the consequences could result in a larger macroeconomic slump. The Federal Reserve has other tools to help with this, but we cannot separate individual-level business actions from the economic policies of the federal government. It takes everyone working in sync to either grow or contract an economy.

When the economy is in a slump, interest rates should be coming down. Keeping cash reserves available will be key so that, when the time is right, practices can capitalize on the lower rates. However, clients will still be constrained until hiring truly picks up. The key here is to help keep them coming in the door. Clients and customers are key to any business, and loyalty from them and your staff is what helps businesses grow in the long term.

The goal of monetary policy and the Federal Reserve is to keep the economy on a stable upward trajectory, or at least one that prevents economic harm to businesses and individuals. Managing risks from the larger economy – whether due to politics, international economic forces, or anything else – is the Federal Reserve’s job, and monetary policy is there to help you. But it is up to you to keep an eye on it and take action to protect yourself, your staff, and your clients from simply being at the whims of broader economic factors.

Wage growth and price growth work together, and it is important to understand that they can “spiral” out of control – but this isn’t always the case, thanks to macroeconomic tools that have been developed. I won’t go into those tools today, as I think it’s important to break down the concept of inflation first, as well as how inflation indices are constructed and used.

Inflation is not about one random price going up. Chicken can get cheaper while coffee gets more expensive, and nothing dramatic is happening. Inflation is about the overall rise in prices across a sector or the broader economy. A simple way to think about it is that inflation is the rate at which the average price of a broad set of goods and services rises over time.

To drive the point home, there are two important things here: we’re talking about an average across many products, not just one product, and we’re looking at changes over time, not a one-off jump. If prices are going up 3% a month/quarter/year on average, that’s 3% inflation. If they’re going down 1% a year, that’s deflation. We feel this in practice as a business as well: “our wholesaler invoice went up again,” “staff are asking for raises because their groceries cost more,” and “the landlord just increased the rent.” Regardless of whether prices are going up for the business or for you as a consumer, all of that lives under the umbrella of inflation.

But how do we measure inflation? The economy sells millions of different things at millions of different prices, and we can’t track them all. So, economists build something called an index. An index is basically a score that summarizes the prices of a big shopping basket.

Imagine a typical household basket: rent or mortgage, food, utilities, petrol, clothes, vet care, phone bill, streaming, and so on. Each item gets a weight based on how important it is in the average budget: rent counts more than Spotify, groceries count more than fancy coffee. We pick a base year and call the index value in that year something simple like 100. As time passes, we re-price that same basket. If the basket gets more expensive overall, the index goes above 100; if it gets cheaper, it goes below 100. If the basket cost £1,000 in the base year (index 100) and a few years later costs £1,100 (index 110), the index is telling you that this basket is now 10% more expensive than it used to be. For consumer inflation, we call this the consumer price index (CPI), and when prices rise for businesses, we create an index called the producer price index (PPI).

You can build an index for almost anything: households, businesses, or other very specific sectors. In the veterinary world, we have the Veterinarian Service CPI that tracks common pet care expenses like vaccines, flea and tick meds, services, and diagnostics. The link between inflation and an index is straightforward: inflation is the percentage change in a price index over a given period. If the index last year was 120 and this year it is 126, the index has risen from 120 to 126, which is a 5% increase. So, we say inflation over that period is 5%.

When you hear someone say “inflation was 3.2% last year,” they are really just describing how much a particular index changed from one year to the next. What is important to note is that not all indices have the same base year, so you must “rebase” them to make them comparable. While the direction, by mathematical principles, will still generally be the same, the magnitude will be different depending on the base periods.

So why do we care? Well, as prices rise, wages must rise to keep up and maintain the number of clients coming into the clinic. If prices rise faster than wages, we as consumers have less buying power. This is when client visits slow, and we need to find ways to maintain revenues or profit. Increasing prices more can help with the issue, but it is only a temporary fix. When wages and the economy are growing, we can raise prices without much change in client traffic. But without this, we have to use different business strategies to attract clients, new and current. Bundling services for a price discount that doesn’t require more labor is a great way. Or forward booking. Or a million other strategies out there.

The point is not to fear inflation, but to monitor it and know what strategies to use when. Being mindful of the economic realities is what will keep your business thriving at all points along the business cycle. Being prepared for the larger macroeconomic effects on your business will only make you more successful when you take the necessary actions.

It feels like the issue of vaccine hesitancy is a new one. Between COVID-19 vaccine hesitancy, the (debunked) claims around vaccines causing autism, and now the spill over into pets, it seems like the phenomenon is accelerating. But the reality is that vaccine hesitancy has been around, well, since the dawn of vaccines themselves.

Can you honestly tell me what goes into making a vaccine? How it interacts with your body? What the short- and long-term health effects are? Is it really effective? Why don’t all vaccines work to prevent me from getting a disease? Can I trust my health professional when they push a vaccine that “just helps a pharma company get rich?” Some of you may cringe at those questions I just posed. Some may praise me for them. But the fact is that these are not unreasonable questions. No matter your opinion on the topic, how we each individually think about the issue of vaccines is what I want to highlight here: Behavioral Economics, the field of economics that applies psychological insights into human behavior to explain economic decision-making.

Behavioral economics is often used to justify why fundamental assumptions of economic reasoning are flawed. This is due to the idea that, when we look at the individual, we find that one often makes irrational choices in the eyes of the homo economicus. But, in my opinion, this isn’t true at all. When it comes to rationality, we are mostly concerned about whether people want to pay higher prices for a good or service (note: I am not talking about willingness to pay here). By and large, this is not true. If we can buy things more cheaply while holding our individual minimum standard for quality and all of things constant, then that is preferred. What behavioral economics tries to understand is the why behind an individual’s choices, even when it may seem counterintuitive to what we think they would do. This is what makes life truly interesting.

With vaccine hesitancy, people behave differently based on several factors. Culture, risk tolerance, information access and trust, interpretability of scientific data, the ability to think short versus long term, and the raw emotions that one deals with when it comes to decisions about health. The decision to receive a vaccine is more complex than one might imagine. This is where behavioral economics can help us better understand such things, while also encouraging us to lean in with empathy.

The other side of the behavioral economics issue is how behaviors aggregate. In the case of vaccine hesitancy, it is not the hesitancy itself that has direct implications. Rather, it is how that behavior manifests in terms of vaccination or not. Hesitancy behavior is fundamentally a concern about the unknown – missing or confusing information, inability to fully assess risks, trust in the process, and the uncertainty of the cost-benefit trade-off.

So, hesitancy is not all about a lack of information. There is a lot of solid scientific evidence about all of these issues. But why are people still hesitant? The answer is well laid out in a book about a different, but similar topic – Real Food, Real Facts: Processed Food and the Politics of Knowledge by Charlotte Biltekoff. This was a book that I read earlier this year. I found it great at tackling the specific issue of processed food, but I couldn’t stop myself from drawing parallels to vaccine hesitancy.

One of Biltekoff’s main arguments is that a disconnect exists between the use of science to justify that something is safe, healthy, etc., and what people are actually concerned about – that the trust in the system has been eroded. We often want to blame people for not “understanding” the issue, but this is something many people fail to fully comprehend… it’s not usually about knowledge. It is about TRUST. When we weaponize scientific evidence for our own agenda, we lose the people who are simply looking for trust and empathy.

As a field, behavioral economics has a plethora of articles on the topic of trust (largely built on tools and theories created in psychology). Yet, we don’t use them in cases like vaccine hesitancy. Why? The answer is what a lot of people tend to ignore when it comes to societal issues – it has to scale (read more from John List about this). What I mean by scale in this sense is that, to tackle a problem like vaccine hesitancy, the solution to alleviate hesitancy has to scale. And, clearly, pumping more scientific information out into the media is not an effective intervention at scale. It fails because it has not alleviated the core concern, the lowest common denominator.

I don’t know how to create more trust in a system as large as healthcare. Many people have felt like healthcare, in both nationalized and corporate systems around the world, has failed them for one reason or another. Solving that issue will be difficult, but it is possible to make some headway on the issue.

But why do we care about vaccination at all? Why is it important that this issue be tackled when it is everyone’s right to make that choice? The argument (note that I did not say “answer”) is about public health. We talked about market failure last month regarding the CMA provisional decision about pricing, but another form is externalities. When it comes to infectious diseases, if only one person is unvaccinated and becomes ill, it only affects them. But if the rates of vaccination are low, even those who are vaccinated are at risk. Not to mention more unvaccinated people/pets means a higher disease burden and thus a higher cost to treat and manage the disease. The costs are not borne by the unvaccinated alone; they affect everyone. There are spillover effects. But again, we have to trust the system that vaccination is a good strategy for the individual and society at large. Not all vaccines are created equal, either, so for each one the risks, trust issues, and cost-benefit analysis have to be evaluated.

So, how do we solve the problem? I don’t know. But continuing to throw more scientific information at pet owners is likely not going to do the trick. I do remember something from my younger days, though, when I competed in sales competitions – you must build rapport to know what type of client you have. Some are basing decisions on emotions, some on technical specifications, and others somewhere along that spectrum. If we want to see more pets vaccinated, it is up to veterinary teams to create trust with the pet owners.

That is also coincidentally my (not-so-subtle) transition into this week’s topic: supply. Supply is one of those terms that is often thrown around, and most people have a general sense of what it means (similar to demand, which will be a later topic). But I have found that just because we think we know what something means, doesn’t mean what actually we think it means. And if that last sentence confused you, that was partially my intent!

Although you may think you understand what it means when I say “the supply of veterinary care,” let’s make sure we are on the same page. The formal definition of “supply” is “the quantity of a good or service that producers are willing and able to sell at different prices at a given point in time.” A producer is anyone who produces something with the intent to sell it. This could be your famous jam/BBQ sauce, hand-sewn blanket, etc. – or, on a bigger scale, things like books, homes, and cars. In veterinary medicine, producers are the veterinary care teams that supply veterinary care.

Hopefully, the “who” of supply is nothing new, but this definition provides a formal structure around what we are talking about. However, many people often forget that supply has both a time component and a price component that work together. How much do we supply today? How will that change tomorrow? What about in one year? If I can earn more per hour of service, I will likely want to increase my ability to provide more hours for that service. When we aggregate everyone offering to supply those work hours at different prices, we end up with what is referred to as a supply curve. It is important to remember that supply refers to the individual, whereas supply curves use an aggregate (sum) view of everyone supplying a specific good or service at different prices.

As an individual, you make decisions behind the scenes about how many hours you want to supply at each different price per hour. As the price goes up, you’ll likely want to supply more hours (with some constraints, given we can’t work more than the number of hours available to us in a day and we all want to have a life outside of work). Yet, we all want to supply a certain number of hours at each price point, and to do that, we need to sum up all the hours the rest of the population is willing to supply at that price point. This market supply curve is therefore quite messy, but such is the reality of the world. We often simplify the market supply by condensing it down into a single line that looks like an individual’s supply, but with much larger quantities.

If we think back to the COVID-19 pandemic, the veterinary industry’s ability to supply more services per hour was constrained due to social distancing protocols. What resulted was a desire to supply more hours of service because prices rose for each hour of service. This then signaled to other producers in the market that there was room for more veterinary practices and Venture Capital owned and independently owned practices entered the market to supply those services at those higher prices. This then led to a desire to increase the supply of veterinarians, and the supply of schools started to increase educational offerings. Prices rose across the board for an hour of work, and everyone responded by trying to supply those hours. But what is happening now? Are these prices for an hour of work still increasing? Or are prices even the same after we account for inflation? This has been the ongoing debate in veterinary medicine workforce discussion. Wages and job vacancies certainly increased during the Pandemic across veterinary medicine, and many other industries! But recent evidence has pointed to slowing economic growth and structural changes in supply – more practices, more veterinary students being trained, etc. – are long term changes.

This brings us to the final point of this week’s newsletter: short-run versus long-run supply. In all short-run scenarios, something is always fixed. You can’t change every part of your production process. Often, we think of this in terms of capital or land. I can’t immediately change the building I am running my business out of. Similarly, I can’t snap my fingers and have more veterinarians be trained and ready to examine my pet tomorrow. In the long run, everything can change… doesn’t that sound a lot like life in general! The division between short and long run is a bit arbitrary, but a rule of thumb is anything less than a year in terms of a business operations is short term – assuming no structural changes.

Why do we need to think through short and long run supply? Why does all of this matter to veterinary medicine? Largely because we are all human. Even though the industry is about animals, it is us humans that supply the care. If the humans of this industry are not taken care of, then there is no care to be had for the animals. What might be “good” for an industry in the short term, might have negative consequences in the long term. Do we want (not I did not say need here) to have more veterinarians in the long term to provide better access to care at a financially feasible wage? In my opinion, the answer is a resounding YES! But reacting to short term changes in labor without caution about whether this is a structural change will make that future less of a reality. Since I am writing this at the end of 2025 among an already weak and struggling economy, it seems like caution is warranted. While I am happy to see such an interest in the field of animal health and more veterinary schools coming online, let us not forget that animal healthcare is a team endeavor and more work could be done to increase the long-term supply of care through several other ways. Greater support from a team and financial perspective for technicians, assistants, practice managers, customer support specialists, kennel staff, and everyone else are likely to have just a big of impact or greater on the industry than veterinarians. Again it takes ALL TEAM MEMBERS to make the long run supply of veterinary care sustainable.