Chapter:

3. Needs, consumption, demand

Demand as a function of price Elasticity of demand
4. Supply, production

Supply as a function of price

Elasticity of supply

Production
5. Principles of health care demand

Health care need

Health care demand

Health care utilization

Relationship between need, demand, supply & utilization

Role of economic policy

Demand and quality of service
1
 What is market?
 Is any set of arrangement by which buyers and
sellers of a commodity interact to determine its
price and quantity.
 Who are buyers in health care system?
 Every body is potentially a buyer or consumer of
health care
 Who are the seller of Health Services

People who provide medical and health
services are the sellers.

2
 Demand…….What is demand?
 Demand is the schedule of amount of a good (service)
buyers want to purchase at different prices during same
stated period of time.
 Demand = Need + ability and willingness to buy a good.
 Need is some one subjective idea and money is not a
factor, but demand is objectively observable behavior in the
market
 Demand is expressed only by spending money
Question:-What is the distinction between need and demand?
Demand
Need
• Objectively observable as behavior in the market.
• Someone's subjective idea (may be
based on a formula applied objectively, • Money is a key factor.
• the choice to use the formula was "Demand" is also called "effective demand,"
someone's subjective idea). because it's expressed only by spending money.
• Money is not a factor.
 Normative need: - Normative need are those services
determined by Experts to be essential for a specific need or
for a specific population group,

example is immunization, and clinical care etc.

 Felt need: - Subjective view of the community, which may

or may not be based on desired requirements, affecting
health planning,

example request for a hospital while primary health care

unit is enough

 Express need: an act up in felt need.

4
Factors affecting demand for a good or service are:

 Own price  Expectation of future

 Average income prices and income

 Tastes
 Price of related goods
(Complementary, Substitutes)
 Income distribution
 Wealth distribution
 Other particular factors ,
etc

5
Law of Demand:
The law of demand states the quantity demanded
of a good/service is inversely related to its price,
other things being equal (ceteris paribus).

D x=f(P x),Ceteri paribus

Demand Schedule: is the tabular presentation of

quantity demanded of a good at different prices.

Demand Curve: is graphic presentation of the

demand schedule.

6
• The law of demand states that
there is a negative, or inverse,
relationship between price and
the quantity of a good
demanded and its price.

• This means that demand

curves slope downward

7
 Demand schedule
Price per disposable Quantity of disposable gown Reference
gown in Birr demanded per day point
1 60 A
2 30 B
3 20 C
4 15 D
5 12 E
6 10 F

P2

P1

Q2 Q1 8
 Movement along and Shift in Demand Curve

 Movement along Demand Curve : occurs as a

result of a change in price of a good/ services.

It is also called change in quantity of demand.

 Shift in Demand Curve: is caused by non-price

factors affecting demand for a good such as

income, taste, and population.

It is also called change in demand
9
 Contraction of demand

Extension of demand

Shift of demand curve

Movement along the demand curve

Q1. What is the factor resulting in contraction of the demand curve?

Increase the in price of the good

Q2. What is the factor resulting in Extension of the demand curve?
Q3. what are the factor resulting in outward shift of the demand curve?
 Rise in income, An increase in preference, Rise in price of
substitute, Fall in price of complement
Q4.What are the factors resulting in inward shift of the curve ?
10
11
 Elasticity of demand
 Elasticity provides a way of measuring how sensitive demand
is to the determinants.

 Elasticity of demand measure the responsiveness of demand

of a good to a change in determinants.

When cost of production is raising the cost the firm will

pass the increment cost to the consumer price.

 But the beneficiarieness depend on:

1/Price elasticity demand for the product ;

 Proportionate change in demand to proportionate

change in price 12
2/ Price elasticity of the substitute,
 the price of the substitute also matters;
 Raising price is only important if demand of the product is less
elastic and the demand of its substitute is much less elastic.

• Substitutes are goods that can serve as replacements for

one another; when the price of one increases, demand for the
other goes up.

• Complements are goods that “go together”; a decrease in the

price of one results in an increase in demand for the other,
and vice versa.
13
Some measures of demand elasticity:-

1.Price elasticity of demand

2.Cross elasticity demand

3. Income elasticity demand

14
1. Price elasticity of demand
 Price elasticity of demand = % change in quantity
% change in price
Ed=
Q%/
P%

Percentage change quantity of demand to one

percentage change in price

Ed- the coefficient of price elasticity of demand, is

negative number, but the minus sign is dropped from
the number and treated as positive.

15
 Different type of price elasticity of demand;
 Price inelastic= demand is not particularly sensitive
to change in price
 Price elastic =demand is particularly sensitive to
change in price

Coefficient of Ed Type of Ed Shape of the Demand

Curve
Ed=0 Perfectly inelastic Dv is vertical
0<Ed<1 Inelastic Dv is steeper
Ed=1 Unitary elastic Dv is 45 degree angle
1<Ed<infinity Elastic DV is Flatter
Ed=Infinity Perfectly elastic DV is Horizontal
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  Graphically;

Price Ed infinity

1<Ed< infinity

0<Ed<1 Ed =1
Ed=o

Quantity

Example 1. if the price heart operation rose by 15% and the quantity fall bout by 10%

1. What is the coefficient of Ed

2. What is the type of Ed type?

3. Describe what the coefficient value of the Ed means

17
Class activity
When the price of heart operation rise by 10% the demand
fall from 800 to 600.

Calculate the price elasticity of demand and give your

explanation on the coefficient of Ed

18
2.Income elasticity demand(YED)
 Measure demand react to change in income
 YED= % change in quantity
% change in income
 Unlike price elasticity which is always negative with
some exception when the goods are inferior , income
elasticity is always positive with the exception when
the goods are inferior
 This is because when the good is inferior people
switch over to the superior good by leaving the
inferior good
E.g. when income rises people prefer to buy more
meat and less potato. 19
20
3.Cross elasticity of demand(XED)
 Measure how demand react to change in price of other goods

XED = % change in quantity

% change in price of other good

If the price elasticity of demand is positive it indicate the

goods are substitutes

If it is negative, then the goods are complement

21
22
The purpose of analysis of demand in
health care
 Is to determine those factors which, on the average,
most affect a persons utilization of medical services.

 The better our understanding of those factors, the

better we will be able to explain variation in
utilization among population groups and among
areas

23
 The Supply
 Supply is the amount of a good producers/sellers
are willing to produce and sell at different prices.

 Factors Influencing the supply of a good or service:

Own price

Production (inputs) cost

production technology

price of substitutes

Future expectations

Market structure/organization

Government policy

24
Law of supply states that the quantity supplied of a
good is positively related to its own price, ceteris
paribus.

Sx= f(Px), Ceteris paribus

Supply Schedule:
Schedule is the tabular presentation of what
quantity of a good will be supplied by the
producer/seller at different prices.

Supply Curve:
Curve is graphic presentation of the supply
schedule. 25
Supply Schedule
Price of Hip Quantity Hip Replacement
Replacement Br. Supplied by the Hospital
2000 1000
2500 2000
3000 3000
s
3500 Price
4000
4000 5000
4500 6000

Fig The supply curve

Quantity 26
Explanation of some of the factors affecting the
decision of supply;

1. Cost of production… dominant factor

 When production cost is high relative to price, producer will
produce little
2. Price of substitutes
 If the price of one substitute rises, this will decrease
the supply of other substitute
3. Market organization
 Monopolized market tend to raise the price at each
level of the out put

27
 in supply
Price
Price s
s

in supply

Supply
Supply Fig. Shift in supply curve
Fig. Movement along the supply curve: Assignment: what shifts supply curve in
occurs as a result of a change in price and out ward?
of a commodity. Eg. Change in cost of production
Eg. Maximizing profit

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 Elasticity of supply
Work on cross elasticity of supply!

 Price elasticity of supply(PES) measure how

sensitive quantity supplied to change in price

PES= % change in quantity supplied

% change in price of the good
PES=
Q%/
P%
 PES is always positive
 PES is more elastic over time; this implies the time it
take to switch resources in to the other market.

29
 The supply of health care
 Three peculiarities (unusual) of the supply of health care
complicate its analysis:

Complexity of Product: health care is not a simple

product, but a related bundle of goods and services
directed towards the same objective of improving health.

In many cases these goods and services are joint

products and the supply and costs of one are not
independent of the others.

They also have a quality dimension that is difficult to

measure objectively 30
 Health Production
 Health Production is the transformation of
inputs in to out puts.

 Production function is the physical relationship

b/n the inputs and outputs of the products.

 Is the process of getting maximum out put from

a given quantity input in particular period of
time
31
 Health care demand
 The ability and willingness to given price of acquire a
certain health care services at certain point in time,

 According to Grossman the demand for health has

two reasons;
1. Pure conception aspect--health is desired b/c it makes
people feel better

2. Pure investment aspect---it increases the number of

health days available to work and to earn income

32
 Demand…
 Demand analysis seeks to identify which factors are most
influential in determining how much care people are willing
to purchase

 The major purpose of demand analysis for medical care is

to determine those factors which afffect utilization of
medical services

 The decision to use health care reflects a combination of

normative and felt need.

 Despite a wide variety of empirical methods and data

sources, the demand for health care is consistently found to
be price inelastic. 33
 Although the range of price elasticity estimates is
relatively wide, it tends to center on –0.17, meaning
that a 1 percent increase in the price of health care
will lead to a 0.17 percent reduction in health care
expenditures

34
Demand of health care
 Poor physical access, the perceived efficacy and quality
of care are important influences over the decision to
demand

 In general, the demand for health is found to be income

inelastic.( How do you see this??)

 The estimates of income elasticity of demand are in the

range of 0 to 0.2.

35
Determinants of demand
 The relative importance of some of the factors
influencing demand may differ from theory.

For example, where beliefs about illness causation imply certain
treatment options, price and income are much less important in
health care utilization decisions.

 These beliefs might be incorporated in item theory of the

demand function ('the organizational and institutional
structure of society, preferences and tastes').

 In practice, however, it is difficult to account for them and

adequately to include them in health care demand
analysis
36
 Michel Grossman’s Model Demand determinants

Individual client factors

[age, sex, education, occupation]

Environmental factors
Health care resources Factors
[physical, economic, Demand E.g. supply, access,
social, cultural]
acceptability

Prepayment factors
E.g. private insurance, tax based health
Insurance, national health system,
managed care, co-payment

37
 Health care need

 Estimation of the required type & volume of resources and

services to provide based on the professional judgment

 It doesn’t consider the price

 The health need determined in two ways, from the

professionals perspective and individual own perspectives

38
Need determination
What individual think?

Need care Doesn't need care

What doctors Person problem, the

would say? need care C1 most worry
some

Person Problem, e.g.. c4

C 1 and C4doesn’t need
are right hypochondrias (Chronic and
decisions
abnormal anxiety about imaginary
care symptoms and ailments)

39
The relation b/n demand, need , supply
,

Price

Quantity

Qn. How can we raise the actual demand so that the equilibrium
quantity demanded will be the same as the needed level?
40
 What about this?? (how to rise need to demand?)

Need
Supply

Demand

41
How to raise the demand to ward the need ?

It can be done by the following

• Advertisement
• Incentive
• Free service E.g.. vaccines
• Putting scary (Provoking fear or terror) messages or
tax ( e.g. on cigarette)
• Etc

42
  The relation b/n the demand, need and
utilization.
Obtain P.
Seek for Care A
preventive care
and demand for
People who do Do not obtain
Do not perceive preventive care
not have P.care
medically health problem B
Do not seek
defined health preventive care
problem or who People who
have problem think the Obtain c. care
but do not problem warrant Seek for
warrant health People who perceive health care , self curative care C
care health problem , self perceive health and demand
Do not obtain
perceived health need for curative care C.care D
problem
Do not seek
People who Think the
have medically Do not perceive problem do not curative care
defined health warrant health Obtain P.care
health problem
care and care Seek for E
warrant health preventive care
care and demand for
preventive care Do not obtain
P.care
Do not seek F
preventive care
43
 A=Utilization satisfied demand for preventive care
 B=unsatisfied demand for preventive care
 C=utilization of satisfied demand for curative health
care
 D=unsatisfied demand for curative care
 E=Utilization of satisfied demand for preventive
health care
 F=unsatisfied demand for preventive care

 Supply = utilization ,when supply is constraint

 Utilization =Demand ,when supply is excess
44
Demand and Quality
 Is conformance to requirements
 Quality of care : the degree to which health service
for individuals and populations increase the
likelihood of desired health outcomes and are
consistent with the current professional knowledge
 Like need there is discrepancy b/n the quality with
in the perception of population and quality
measured by medical profession

45
Comparisons individual perception of quality?

High quality poor quality

Medical High quality C1

definition C2: E.g.. Waiting
of quality room problem

C3: Poor Eg.Placebo, injection c4

quality

46
Demand and quality
 Determinant of demand that demand special attention is
quality of medical service

High quality Demand curve

Low quality

Low quantity High quantity

47
Market equilibrium

 Market price is set by the interaction and demand

supply
 Equilibrium means a state of equality or a state
of balance between market demand and
supply.

A price at which excess demand equals zero

At the equilibrium price there is no net tendency

for price to change.
48
 Market equilibrium

EQULIBRUM

Price D

Quantity

49
Equilibrium…

 Excess demand exists when, at the current price, the

quantity demanded is greater than quantity supplied.

 Excess supply exists when, at the current price, the

quantity supplied is greater than the quantity
demanded.

 Graphically they looks the following;

50
Excess supply = Qs - QD

price
EXCESS SUPPLY
supply
p = $3

demand

QD QS
quantity

51
Excess demand = QD - QS

price
supply

EXCESS DEMAND

p = $1
demand

QS QD quantity

52
 When there is EXCESS DEMAND for a good, price will
tend to rise.

 When there is EXCESS SUPPLY of a good, price will

tend to fall.

 When excess demand equals zero, price must be the

equilibrium price, and we say the market is in equilibrium.

53
54
55
 Economists are interested in the explaining equilibrium
prices.

 Market price serves as the adjustment mechanism to

move markets to equilibrium.

 Price changes in response to the existence of excess

demand or excess supply.

 Changes in demand and changes in supply lead to

changes in equilibrium prices and quantities.

56
Thank You

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