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:
Increased population
Increased income
Changes in taste



Demand curve shift to the left
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
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

***SOME
EXCEPTIONS
East Java market
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
Tastes & preferences

Demand curve shifts right

Shortage at initial price


P to restore equilibrium (sellers respond, Qs
)

New equilibrium: higher P & higher Q
D
Disequilibrium
P adjustment
Qs response
Law of S
Hot Weather






Increase In The Demand For Ice Cream





Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
Supply Supply
Initial
equilibrium
Initial
equilibrium
DD
DD
3. . . . and a higher
quantity sold.
3. . . . and a higher
quantity sold.
2. . . . resulting
in a higher
price . . .
2. . . . resulting
in a higher
price . . .
2. . . . resulting
in a higher
price . . .
1. Hot weather increases
the demand for ice cream . . .
1. Hot weather increases
the demand for ice cream . . .
2.00
7
2.00
7
New equilibrium $2.50
10
New equilibrium $2.50
10
$2.50
10
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?


Is there an inverse relationship
between the price of health care
and the quantity of health care
demanded?

Health care is demanded if it is
absolutely necessity
Short-term costs overshadows
long term returns
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. Are health care providers
profit maximizers?
2. Is there a positive relationship
between the price of health
care and the quantity of
health care supplied?
3. What impact do the costs of
production have on supply of
health care?
4. How do changes in
technology affect the quantity
of health care supplied?
5. To what extent is the quantity
of health care supplied
affected by the prices of other
goods?

Are health care providers
profit maximizers?
Is there a positive relationship
between the price of health
care and the quantity of
health care supplied?
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
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

SUPPLIER INDUCED
DEMAND
1. Consumption benefits
2. Investment benefits
1. Fee for service
reimbursement
2. Third party payment
3. Limited peer review
4. Infrequent purchase of
health care
5. 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. Fee for service reimbursement
2. Third party payment
3. Limited peer review
4. Infrequent purchase of health care
5. Medico-judicial environment
TRENDS IN THE HEALTH MARKET