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CHAPTER Three

Health Care
Demand and
Supply
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On completion of this unit, students will be able to:
Define what is demand
Describe the Determinants factors of Demand
Explain the Equilibrium of supply & demand
Identify Determinants of Demand Elasticity
Explain Price Elasticity of Demand

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Demand
Demand describes the behavior of consumers. It does
not mean the desire to obtain.
In economics the hungry man who can not pay for
food has no demand for it. He has simply want for
food!!
An individual’s demand for a good is the various
quantities of it and consumer is willing and able to buy
at each specific price.
Demand = Need + ability and willingness to pay for a
commodity.
3
Factors influencing consumer demand
The price of the good
The price of substitutes
The price of the complements of the good
Change in income of consumer
Change in choice of consumer. Likes and dislikes in
consumption.
Consumer expectation about future:
 Change in future price of goods
 Change in future income
Population Change
As the number of consumers in a market changes the
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Shifts in Demand
Substitutes
Other goods which satisfy the same wants, or provide
same characteristics. Goods that can be consumed in
place of one another. E.g.: Private and public hospitals,
coffee and tea,Pepsi and Coke .
Two goods are substitutes when a change in the price
of one causes a shift in demand for the other in the
same direction as the price change.

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Shifts in Demand…
Complements
Goods that are related in such a way that an increase in
the price of one leads to a decrease in the demand for
the other. Two or more goods which are consumed
together. E.g. sugar and milk, Car and Engine, etc.
Two goods are complements when a change in the
price of one causes an opposite shift in the demand
curve for the other.

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Normal and Inferior Goods
Normal Goods
Goods for which demand rises as income rises, most
goods are normal goods
Increase when income of consumers increase
Falls when income of consumer decreases
Eg LCD and plasma television, cars, branded closes,
expensive house YED>0
LUXURY GOODS –increased income leads to bigger
% increase in demand eg spare parts, cars
YED> 1
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Inferior Goods
Describes a Goods for which demand falls as people
income rises
EG. Consumption of breads or cereals since the income of
the consumer increase move to more nutritious foods
travel by public transport , hematology tests
Cheap substitutes (supermarket coffee)
YED<0
 as the income of consumer increases demand for
normal goods will increase and demand for inferior
goods decrease and vice versa

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Law of demand
“Lower the price, greater the quantity demanded, keeping
the other factors constant”. This inverse relationship
between price and quantity demanded is known as law of
demand

At lower prices people are able and willing to purchase


more of a commodity than at higher prices

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Demand Schedule
A table that shows the quantity demanded of goods or
service at different price.
The relationship between price and quantity bought is called
demand schedule.

Graphical representation of this demand schedule is demand


curve.

To plot the information of the demand schedule, price on


the vertical axis and quantity demanded on horizontal axis.
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Demand Schedule …

Plotting each pair of data on a graph and joining the


resulting points give us the individual consumers
demand curve.

The curve slopes downward from left to right. Quantity


demanded and price are inversely related.

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Demand Curve

Price

P2

P1

Q2 Q1 Quantity

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Demand …
Factors That Cause an Increase (rightward or upward
shift) in Demand;
1. A decrease in the price of complements to the
good or service.
2. An increase in the price of substitutes for the good
or service.
3. An increase in income (for a normal good).
4. An increased preference by demanders for the
good or service.
5. An increase in the population of potential buyers.
6. An expectation of higher prices in the future.

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Need versus demand…
Health plans that focus on need and ignore demand
will face under- or over-utilization of service capacity

If one believes quantity demanded is too little or too


much (e.g. under-use or over-use of emergency room)
relative to need, then quantity demanded must be
manipulated by changing,
price or other costs to buyer, or
demand through marketing or de-marketing

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Demand for health care

The major purpose of demand analysis for medical


care is to determine those factors which on the
average, most affect a persons utilization of medical
services.

Demand analysis seeks to identify which factors are


most influential in determining how much care people
are willing to purchase.

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Demand for health care
Demand is based on the individual and community
expectations.

The individual may feel that he needs a service, but


expert opinion may say that this is not a reasonable
demand
E.g. patient may ask the physician for an antibiotic
to treat viral infection, which would not help in cure
and may cause harm.

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Need, Demand and Utilization of Health
Services
Need in medical care defines as the amount of
medical care that medical experts believe a person
should have to remain or become as healthy as
possible

Need in medical care exists when an individual has


symptoms, illness or disability for which there may be
an effective or acceptable treatment or cure from
which the patient can benefit
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Need, Demand and Utilization of Health
Services …
Demand for medical care exists when an individual
considers that he has a need and willing to spend
resources of money, time, energy, loss of work, travel
and inconvenience to receive care.

Utilization occurs when the individual actually acts on


this demand or need and receives health services.

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Types of Need

Normative need
Normative needs Identified according to a norm(set of
standards)set by experts.
 are those services determined by experts to be
essential for a specific need or for a specific
population group.
E.g. pre natal care, immunization, management of
hypertension, diabetes, screening for breast cancer and
prostate cancer etc.

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Types of Need…
Felt need
• need which people or patient feels / need from
perspective of the people who live it
• Felt need is the subjective view of the patient or
community, which may or may not be based on actual
physiologic needs

• E.g. public knowledge is vital to acceptance of


immunization programs, treatment for chronic diseases
etc
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Types of Need …
Felt need also affect health planning

E.g. A community or donor feel that a community needs


a new hospital but the same resources might better to
spent on developing primary care or health education
purpose that have a great impact on health of
population.

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Types of Need …
Expressed need
 when people put what they want into action
 Expressed need is a felt need that is acted on, such as
visiting a clinic or general practitioner.

Felt need may not be acted on because of economic,


geographic, social or psychological barrier may inhibit a
person from seeking or receiving a care.

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Types of Need …
E.g. A service is free, but not readily accessible due to
obstacles such as distance, language cultural barriers or it
may due to difficulty in arranging an appointment, long
waiting period ,cost of travel etc

A religious or cultural factor may prevent a woman from


practicing birth control

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Types of Need …
Comparative need
• Comparative need is a term that relates needs of similar
population groups, as in two adjacent regions with same
age/sex/ethnic mix and socio-economic status

• E.g. One region practices fluoridation of water supply


while the comparison community does not. The population
of the second community in need of that service

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Elasticity of demand
Demand elasticity: is a measure of how much buyers
respond to changes price, income, and other things.
Elasticity provides a way of measuring how sensitive
demand or supply is to factors such as a change in price.
A change in any of the demand will cause a change in
quantity purchased of a good/ time period.
Elasticity of demand forms part of demand analysis and is
useful in cases where demand curve analysis fails to
provide reliable results.

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Elasticity of demand
The coefficient of elasticity of demand is the % change
in the dependent variable [quantity demanded] divided
by the % change in the independent variable [demand
determinant].

The main measures are:


Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
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Elasticity of demand…
1. Price elasticity of demand
The quantity of a product demanded will vary inversely to
the price of that product.
Price elasticity of demand is the responsiveness of the
quantity demanded of a good to changes in the goods
price, other things held equal.
To measure the responsiveness of the quantity demanded
to change in price, we use a measure called Price
Elasticity Of Demand.

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Elasticity of demand …
Price elasticity of demand is the percentage change in
the quantity demanded relative to a percentage change in
its own price.
Price elasticity= % change in quantity demand
% change in price

Q P Q P
ED    
Q P P Q
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Using Price Elasticity of Demand
Elasticity is a pure ratio independent of units.

Since price and quantity demanded generally move in


opposite direction, the sign of the elasticity coefficient is
generally negative.

Interpretation: If ED = - 2.72: A one percent increase in


price results in a 2.72% decrease in quantity demanded

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Price Elasticity of Demand (ED)
A numerical example
Quantity Q2-Q1 Price P2-P1 ED

1 1 125 -25 (1/-25)X(125/1) = - 0.04x125 = - 5

2 2 100 -50 (2/-50)x(100/2) = - 0.04x50 = - 2

4 1 50 -40 (1/-40)x(50/4) = - 0.025x12.5 = - 0.3

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Ranges of Elasticity
Inelastic Demand
 Percentage change in price is greater than percentage
change in quantity demand.
 Price elasticity of demand is less than one.
 Large P-change, small Q-demanded change.

Elastic Demand
 Percentage change in quantity demand is greater than
percentage change in price.
 Price elasticity of demand is greater than one.
 Small P-change, large Q-demanded change
32
Price Elasticity of Demand …
Classifications of Price Elasticity of Demand:
Inelastic demand ( |ED| < 1 ): a change in price brings
about a relatively smaller change in quantity demanded
(ex. gasoline).

Unitary elastic demand ( |ED| = 1 ): a change in price


brings about an equivalent change in quantity
demanded.

Elastic demand ( |ED| > 1 ): a change in price brings


about a relatively larger change in quantity demanded
(ex. expensive wine).
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Price Elasticity of Demand …
Demand tends to be more inelastic
If the good is a necessity.
If the time period is shorter.
The smaller the number of close substitutes.
The more broadly defined the market.
Demand tends to be more elastic :
 If the good is a luxury.
 The longer the time period.
 The larger the number of close substitutes.
 The more narrowly defined the market. 34
Price elasticity of demand…

35
Elasticity of demand…
2.Income elasticity demand
• The income elasticity of demand is the % change in demand
for a product divided by the % change in the income of the
consumer holding, provided other things remains un changed.

EI= %change in demand for a product


% change in income of the consumer

Qy I Qy I
EI    
Qy I I Qy

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2. Income elasticity demand…

E.g. Units of Y demanded Income EI


100 1200 birr
150 1600 birr

Q = 50 I= 400

Qy I
E I = I  Qy = (50/400)x(1200/100) = 1.5

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Income Elasticity of Demand (EI)…
Interpretation:
If EI = 1.5: A one percent increase income results in a
1.5 % increase in quantity demanded.
Classification:
If EI > 0, then the good is considered a normal good
or Superior goods (ex. food items , luxury).
If EI < 0, then the good is considered an inferior
good.
A good is a luxury good if income elasticity > 1.
A good is a necessity good if income elasticity < 1.
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Income Elasticity of Demand (EI)…
 Normal goods have a positive income elasticity.

 Inferior goods have a negative income elasticity


 Necessities are income inelastic. typically have an income
elasticity between 0 and 1. Examples: food, fuel, clothing,
utilities, medical care.

 Luxuries are income elastic. typically have an income


elasticity greater than 1. Examples: cars, jewelry, gourmet
foods.
39
Income Elasticity of Demand (EI)…
Effect Income Classification of
elasticity good
coefficient
A proportionately >1 Luxury goods
larger change in the
quantity demanded
A proportionately <1 Normal goods
smaller change in the
quantity demanded
A negative change in <0 Inferior goods
the quantity
demanded
40
Elasticity of Demand …
3. Cross elasticity demand
The cross elasticity is the measure of responsiveness of demand
for a commodity to changes in the price of its substitute or
complementary goods.

For instance, cross elasticity of demand for tea (t) is the


percentage change in its quantity demanded with respect to the
change in the price of its substitute coffee (c).

ExPy = % change in demand for product X


% change in the price of product Y
Qy Px
Edyx  
Px Qy
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Classification of Cross-price elasticity of Demand

Classification:
If (Edyx > 0): implies that as the price of good X increases, the
quantity demanded of Good Y also increases. Thus, Y and X are
substitutes in consumption (ex. Coffee and tea).

If (Edyx < 0): implies that as the price of good X increases, the
quantity demanded of Good Y decreases. Thus Y & X are
Complements in consumption (ex. Milk and sugar).

If (Edyx = 0): implies that the price of good X has no effect on


quantity demanded of Good Y. Thus, Y & X are Independent in
consumption (ex. bread and coke) 42
Cross-Elasticity…
Positive cross-elasticity  substitutes
Higher positive elasticity  higher substitution effect
Negative cross-elasticity  complementary
Higher negative elasticity  higher complementary
effect

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Factors Affecting Elasticity Of Demand
Nature of commodity
Availability of substitutes
Multiple uses
Deferred consumption
Position of the commodity in consumers budget
Time factor
Habit
Price change
Income group

44
Features of price elasticity of demand
Features Elastic goods Inelastic goods

A rise in price A large fall in demand A smaller fall in


demand

Number of substitutes Many Few

Type of good Luxury Necessity

Price of good Expensive Cheap

Example Car Food items


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Elasticity of demand in heath care
Demand may be affected by factors determined by the
consumer, the provider, the supply or location of services.
Elasticity of demand relates, demand to the price of the
goods or services.

Cost to the consumer is a factor in choosing to purchase


goods or services.
If the prices will goes up, then demand will decline or
vice versa.

46
Elasticity of demand in heath care…

Demand is not an absolute but will be fixed or affected by price


and out of pocket payment required for the service.

In the capitalist economic theory, the individual is seen as the best


judge of his/ her own needs and decides what to buy [consumer
sovereignty].

Consumer purchase services or a health plan based on factors such


as cost and quality.
Individual decisions are made on the basis of personal perception,
information ,and resources.
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A model of demand for medical
care
Consumer purchase goods and services for the utility.

If the commodity demanded by consumers is good


health, then health can be produced by goods and
services purchased in the market as well as by the time
devoted to preventive measures.

Demand for medical care is derived from the more


basic demand for health

48
A model of demand for medical
care …

According to Michel Grossman” consumers have a


demand for health for two reasons:
Health is a consumption commodity—it makes the
consumer feel better.
Health is an investment commodity—a state of
health will determine the amount of time available to
the consumer.

49
A model of demand for medical
care …
Health is a consumption good means that health related
activity will improve the quality of life, prevent discomfort
or illness
E.g. cosmetic surgery, speech therapy, physiotherapy etc

Health is an investment means, being unhealthy brings


discomfort, loss of in- come from reduced work hours,
increase the number of sick days, absence from schools etc

50
Michel Grossman’s Demand
Model
.
Individual client factors
[age, sex, education, occupation]

Environmental factors Health care resources


physical, economic, Demand factors
social, cultural E.g.., supply, access,
acceptability

Prepayment factors
E.g.., private insurance, tax based health
Insurance, national health system,
managed care, co-payment
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Michel Grossman’s Demand
Model …
This method looks at health within the frame work
of a production function that is, health status
[output] is a result of health care activities [input] by
the environment, the individual, and the health
service system.

According to this model every one inherits a stock of


health when born

52
Michel Grossman’s Demand
Model …
Health depreciated overtime, however an investment
is required to sustain health.

As peoples’ age advances there is an increase in rate


of illness and in the utilization of health services.

The stock of health can be sustained by investment


to maintain health., such as use of health services and
health promoting activities.

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Medical care demand
A view of medical care demand being derived from the
demand for health implies the following:
First, increase in age result in an increase in the rate at
which the person’s stock of health depreciates.
Over the life cycle people will attempt to offset part of
the increased rate of depreciation in their stock of health
by increasing their expenditure on health

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Medical care demand …
Second, the demand for medical care will increase
with increases in person’s wages.
There is a positive relationship between wages and
demand for health care.

Third, education has a negative? effect on the


demand for health care, because more highly
educated people are presumed to be more efficient in
producing health.

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Up on completion of this unit, students will be able to:
Define what is Supply
Describe the Determinants of supply
Explain the Equilibrium of supply & demand
Identify Determinants of Supply Elasticity
Explain what is Price Elasticity of Supply

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Supply Schedule
Supply means, the quantity of goods or services a
seller is willing to produce and sell.
The amounts of a good producers are willing and able
to sell at a given price.
The supply schedule of a commodity refers to the
relationship between the market price and the amount
of that commodity that producers are willing to
produce and sell.

57
Supply Schedule …
Here the price is plotted on vertical axis--- quantity
of supply on horizontal axis.

The supply curve slopes upwards and to the right.

Price and supply is directly related, more price , more


supply.

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Supply curve

Price

P3
P2
P1

S1 S2 S3 supply
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Determinants of supply
The determinants of supply follow:
Production costs, how much a good costs to be
produced
The technology used in production, and/or
technological advances
The price of related goods
Supplier expectations about future prices
Number of suppliers.
Government restrictions.
60
Equilibrium of supply & demand

Market equilibrium occurs when two economic variables


[supply and demand] are in balance.
 The market equilibrium comes at that price and quantity
where supply and demand forces are in balance.

 At such a price the quantity and amount that buyers wish


to buy is just equal to the amount that sellers wish to sell.
At that equilibrium price and quantity tend to stay same
as long as other things remain equal.

61
Equilibrium of supply & demand …

Equilibrium price and quantity come at that level where


the amount willingly supplied equals the amount willingly
demanded.

In a competition market this equilibrium is found at the


intersection of supply and demand curves.
No shortages or no surplus are found at equilibrium
price.

62
Equilibrium of supply and demand…

Price
Supply

Equilibrium point

Demand

Quantity

63
Analyzing Changes in Equilibrium
1. Change in demand- shifts in the demand curve.

2. Change in supply- shifts in the supply curve.

3. Changes in both supply and demand- Change in


equilibrium quantity and price.

64
Price Elasticity of Supply
Supply elasticity: is a measure of how much sellers
respond to changes in price and other things.

Elastic supply: supply can react quickly to changes in


price. That quantity changes by a greater percentage than
the percentage change in price.

Inelastic supply: it will be difficult for suppliers to react


swiftly to changes in price. That quantity doesn't change
much with a change in price.

65
Substitution and Production Costs
The ease of substitution can vary in production as
well as in consumption.
If capital, labour, equipment and/or land can be
easily shifted from one product to another, then the
supply of Product A would be elastic.

66
Determinants of Supply Elasticity….

Space Capacity
If the firm has lots of space to expand production
quickly, then the supply will be more elastic
Inventory
If the firm has a lot of raw materials and
components on hand, they can easily respond to a
change in demand, causing the supply curve to be
more elastic.

67
Determinants of Supply
Elasticity…
Time period
Supply is more elastic when the firm has a longer
period of time to respond to changes in the market.

In the short-run, the supply curve may be inelastic as


the firm may have difficulties changing their
production processes or factors of production.
In the long-run, there is time for new solutions to be
developed increasing the elasticity of supply.

68
Price Elasticity of Supply…
The price elasticity of supply is either zero or a
positive number.
A zero price elasticity of supply means that the
quantity supplied will not vary as the price varies.
A positive price elasticity of supply means that as
the price of an item rises, the quantity supplied
rises.

69
Interpreting Elasticity of
Supply
If
Es > 1 elastic supply

Es < 1 inelastic supply

Es = 1 unitary elastic supply

70
Features of price elasticity of Supply
Features Elastic goods Inelastic goods

A rise in price A large rise in A smaller rise in


supply supply
The good is produced Rapidly Slowly

The time period Months Days

The firm has Larger stocks Limited stocks

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Price Elasticity of Supply…..

72
Supply…
 Factors That Cause an Increase (rightward or
upward shift) in Supply
1. A decrease in the cost of materials, labor, or other inputs
used in the production of the good or service.
2. An improvement in technology that reduces the cost of
producing the good or service.

3. An improvement in the weather, especially for


agricultural products.
4. An increase in the number of suppliers.
5. An expectation of lower prices in the future.

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Supply in health care
Demand may also be induced by the supply or
provision of care

Making more hospital beds may increase their use


beyond justifiable need or it may lead to an
unnecessary long stay in hospital.

Providing some services at no cost to patients may


induce people to utilize those services more really than
required for health reasons.

74
Supply in health care …
An inappropriate or excessively frequent use of a
service is promoted and used by upper and middle class,

 While the important services may be lacking to serve


the poor due to inequitable allocation of resources.

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