Economics

Shift in Demand Curve

Demand curve may shift to
the left
Not willing to pay as much
Thus price drops
Due to drop in income

Demand curve may shift to

the right
willing to pay more for
product
Due to:
Demand curve shift to the left

Increased population
Increased income
Changes in taste

Shift in Supply Curve

If it becomes easier to
produce a product,
supply curve will shift
to right

More farmland
More children for labor
Fertilizer available
Water available
Technology available

Price drops

DETERMINANTS OF DEMAND
PRICE
POPULATION
INCREASE IN POPULATION
= DEMAND INCREASE
DECREASE IN POPULATION
= DEMAND DECREASE
***SOME EXCEPTIONS

PRICES OF RELATED
GOODS
SUBSTITUTE GOODS =
Goods that can be used to
replace the purchase of similar
goods. (Butter &
Margarine)

*An increase in a products

price leads to an increased
demand for the products
substitute goods.

Income Elasticity of Demand

INCOME
INCOME INCREASE
= DEMAND
INCREASE
INCOME DECREASE
= DEMAND
DECREASE

East Java market

***SOME
EXCEPTIONS

Engels Law

The proportion of
household budget
spent on food
decreases as income
increases
Wealthy spend less %
of their wealth on food

Bennetts Law
The ratio of starchy
foods in the diet falls
as income rises
Poor eat more starchy
foods
Grains
Root crops
Wealthy eat more
meat, fruit, vegetables

..DETERMINANTS OF DEMAND
PRICES OF RELATED
GOODS
Complementary Goods
Goods that are commonly
used with other goods.
(Paintbrush & Paint)

*An increase in a products price

leads to an decreased demand
for that products
complementary goods.

PRICES OF RELATED
GOODS
SUBSTITUTE GOODS =
Goods that can be used to
replace the purchase of similar
goods. (Butter &
Margarine)

*An increase in a products

price leads to an increased
demand for the products
substitute goods.

DETERMINANTS OF DEMAND
COUNSUMER EXPECTATIONS
Expectations of increased income = demand
increase
Expectations of decreased income = demand
decrease
Expectations of increased in PRICE = demand
increase in the current period
Expectations of decreased in price = demand
decrease in the current period

DETERMINANTS OF DEMAND
COUNSUMER TASTES AND
PREFERENCES
POPULARITY INCREASE =
DEMAND INCREASE
POPULARITY DECREASE =
DEMAND DECREASE

MARKET SIZE
MARKET SIZE INCREASE =
DEMAND INCREASE
MARKET SIZE DECREASE =
DEMAND DECREASE

Increase In The Demand For Ice Cream

Hot Weather

Tastes & preferences

Demand curve shifts right

Shortage at initial price

D
Disequilibrium
P adjustment
Qs response
Law of S

P to restore equilibrium (sellers respond, Qs

)

New equilibrium: higher P & higher Q

Increase In The Demand For Ice Cream

Price of
Ice-Cream
Cone

1. Hot weather increases

the demand for ice cream . . .

Supply
New equilibrium

$2.50
2.00
2. . . . resulting
in a higher
price . . .

Initial
equilibrium
D
D
7
3. . . . and a higher
quantity sold.

10

Quantity of
Ice-Cream Cones

Factors That Shift The Demand Curve

DETERMINANTS OF SUPPLY

Price
Number of sellers
Cost of Production
Availability of inputs
Taxes
Consumers Price Expectation

Factors That Shift The Supply Curve

Market Shocks

What Happens to Price and Quantity

When Supply or Demand Shifts?

Law of Demand and Supply

When there is shortage , price will increase;
When there is surplus, price will decrease
Qd> Qs , price is high
Qs>Qd, price is low
Qd=Qd, price is constant

Price

Quantity
Demand

Quantity
Supply

Market
Condition

Price
Condition

20

100

20

Shortage

High

35

80

40

Shortage

High

50

60

60

Equilibrium

Constant

65

40

80

Surplus

Low

80

20

100

Surplus

Low

Market Efficiency

The Invisible Hand

guides decision-making
rewards efficient producers and consumers
goods society wants
prices society is willing and able to pay

Markets & Competition

Competition Regulates Markets

buyers and sellers both gain from exchange
prices adjust to encourage trade
markets clear
competition directs goods & services
(resources) to their most highly-valued uses

Markets & Competition

Market Forces & Equilibrium

Price floats to where Qs = Qd and the market clears.
This price facilitates all transactions that can
improve the well-being of market participants.

Goods purchased by those with highest value.

Goods produced by those with lowest opportunity
cost.

The well-being of society is maximized.

HEALTH MARKET

DEMAND AND SUPPLY

OF
HEALTH CARE
Analysis of how the basic theory in
economics maybe applied to health
care

outline
The problem of scarcity is
exceptionally acute in health
sector
Assumptions : consumers are
utility maximizers
The demand and supply of
health care may not behave in
the way that economic theory
predicts
The possibility of market
failure

Conditions for ideal market :

certainty, no externalities,
perfect knowledge, consumers
to act free of self interested
advice from health care
providers, small suppliers
Clinical iceberg
Imperfect agency
Conditions favoring demand

FRAMEWORK OF HEALTH CARE MARKET

1. What health care interventions or treatments
should be available?
2. How should these treatments be provided?
3. Who should receive these treatments?

APPLYING THE THEORY OF DEMAND TO

HEALTH CARE
1. Are consumers of health care utility maximizers?
2. Is there an inverse relationship between the price
of health care and the quantity of health care
demanded?
3. Is the quantity of health care demanded affected
by the level of income?
4. To what extent is the quantity of health care
demanded affected by the prices of other goods
5. Is the amount of health care demanded affected
by tastes and trends?

Are consumers of health care

utility maximizers?

Health care is demanded if it is

absolutely necessity
Short-term costs overshadows
long term returns

Is there an inverse relationship

between the price of health care
and the quantity of health care
demanded?

Standard economic theory

Demand for health care may not
be well affected by price
a. A rise in the price of health
care
- constraint of income
-absolute necessity
b. A fall in the price of health
care
- involves disutility

Is the quantity of health care

demanded affected by the
level of income?

To what extent is the quantity

of health care demanded
affected by the prices of
other goods

Normal goods exhibits positive

relationship
Budget constraint
Largely unaffected

Factors affecting health : diet,

level of exercise, living
conditions and lifestyle
Related Goods : Substitute
and Complimentary Goods

Is the amount of health care

demanded affected by tastes
and trends?

Factors affecting tastes and

preferences : convenience,
custom and attitudes

APPLYING THE THEORY OF SUPPLY TO

HEALTH CARE
1.
2.

3.
4.

5.

Are health care providers

profit maximizers?
Is there a positive relationship
between the price of health
care and the quantity of
health care supplied?
What impact do the costs of
production have on supply of
health care?
How do changes in
technology affect the quantity
of health care supplied?
To what extent is the quantity
of health care supplied
affected by the prices of other
goods?

Are health care providers

profit maximizers?

Benevolence maximize the

welfare of the patients,
regardless of the costs
WORLD OF SCARCITY
Profit maximization
Income and Profit :
determinant for health care
level provision

Is there a positive relationship

between the price of health
care and the quantity of
health care supplied?

1.

Rise in Price Level upward

sloping
2. A fall in price level- upward
sloping

What impact do the costs of

production have on supply
of health care?

How do changes in technology

affect the quantity of health
care supplied?

Cost of Production affects level

of supply
Budget constraint

Technology supply larger and

better quantities of goods and
services
Medical Technology,
Laboratory Faciltiies
Nurses
Physicians

To what extent is the quantity

of health care supplied
affected by the prices of
other goods?

Directly affected
Health care provider
specializing obstetrics
procedure may decide to
concentrate more on
gynecological procedures

ISSUES ON MARKET FAILURE IN THE

HEALTH SECTOR
1. Certainty
2. No externalities : spillovers from other peoples
production or consumption of goods that affect
an individual in either a positive or negative
way
3. Perfect Knowledge
4. Consumers to act free of self interested advice
from health care providers
5. Several small suppliers to promote genuine
competition

PERFECT KNOWLEDGE
PATIENT

HEALTH CARE PROVIDERS

Information about the health

status
Information about available
treatments
Information about the
effectiveness of treatment

Medical Knowledge
Knowledge of the Patients
Circumstances
Knowledge of the patients
individual preference

1. Health care providers may not have the information required

to act as a perfect agent
2. Health care providers may exploit the ignorance of consumers
in order to maximize their own utility

NATURE OF HEALTH CARE

DERIVED DEMAND

1. Consumption benefits
2. Investment benefits

SUPPLIER INDUCED
DEMAND

1.
2.
3.
4.
5.

Fee for service

reimbursement
Third party payment
Limited peer review
Infrequent purchase of
health care
Medico-judicial environment

CLINICAL ICEBERG
Inpatients
Outpatients
GP
Individuals with symptoms
taking non-health action
Individuals with
symptoms taking no action

Individuals with no
symptoms

FACTORS AFFECTING ILLNESS BEHAVIOR

The visibility and recognisability of symptoms
The extent to which the symptoms are perceive as serious
The extent to which symptoms disrupt family, work and other
social activities
The frequency and persistence of the appearance of symptoms
The tolerance threshold of those who are exposed to and
evaluate symptoms
The available information, knowledge and cultural
assumptions to evaluate
The needs competing with illness responses
The possible competing interpretations that can be assigned
to the symptoms once they are recognised
The availability of treatment resources
The monetary costs of taking actions

Other factors affecting demand for

health

1. size of population
2. health status of population
3. method of hospital admission
4. cost to patients of consumption
5. supply and availability of health resources and
unmet need
6.clinical uncertainty

CONDITIONS FAVOURING DEMAND

INDUCEMENT
1.
2.
3.
4.
5.

Fee for service reimbursement

Third party payment
Limited peer review
Infrequent purchase of health care
Medico-judicial environment

TRENDS IN THE HEALTH MARKET