Session 3-5 Models of Demand for health.ppt

Health economics for health science institute

1. Chapter:
3. Needs, consumption, demand
Demand as a function of price Elasticity
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

2. What is mWhat 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

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

4. Factors affecting demand for a good or service are:Factors affecting demand for a good or service are:
Own price
Income of consumers
e.g. Normal and inferior goods.
Tastes
Price of related goods
oComplementary goods
e.g.. Car Vs gasoline
oSubstitutes goods
e.g. electricity Vs biomass fuel 4
Expectation of future
prices and income
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
As price of a commodity increases its quantity demanded
will decrease and vice versa
Demand Schedule: is the tabular presentation of quantity
demanded of a good at different prices.
Demand Curve: is graphic presentation of the demand
schedule.
5

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
6

7. Demand schedule
Price per disposable
gown in Birr
Quantity of disposable gown
demanded per day
Reference
point
11
22
33
44
55
66
60 60
3030
2020
1515
1212
1010
A
B
C
D
E
F
7Q1Q2
P2
P1

8. Movement along and Shift in Demand CurveMovement 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
8

9. Contraction of demand
Extension of demand
Movement along the demand curve
Shift of 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 ?
9

10. 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
11

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.

12

13. Some measures of demand elasticity:-
1.Price elasticity of demand
2.Cross elasticity demand
3. Income elasticity demand
13

14. 1. Price elasticity of demand (PED)
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 value of PED is always negative reflecting the
inverse relationship between price and quantity demanded.
 Elasticity’s are scale free.

14

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
15

16. Graphically;
Quantity
Price Ed infinity
1<Ed< infinity
Ed =1
E
d
=
o
0<Ed<1
16
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

17

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.
18

19. 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

20

21. 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
22

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
23

24. Law of supply 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 ScheduleSupply Schedule: is the tabular presentation of what
quantity of a good will be supplied by the
producer/seller at different prices.
Supply CurveSupply Curve: is graphic presentation of the supply
schedule.
24

25. Supply Schedule
Price of Hip Replacement
Br.
2000
2500
3000
3500
4000
4500
Quantity Hip Replacement
Supplied by the Hospital
1000
2000
3000
4000
5000
6000
25
Price
Quantity
Fig The supply curve
s

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
26

27. Price
Supply
Supply
Price
Fig. Movement along the supply curve:
occurs as a result of a change in price
of a commodity.
Eg. Maximizing profit

Fig. Shift in supply curve
Assignment: what shifts supply curve in
and out ward?
Eg. Change in cost of production
s
s
in supply
in supply
27

28. 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.
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Work on cross elasticity of supply!

29. The supply of health care
29
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
30

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
31

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. 32

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
33

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.
34

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
35

36. 36
Michel Grossman’s Model Demand determinants

Prepayment factors
E.g. private insurance, tax based health
Insurance, national health system,
managed care, co-payment
Health care resources Factors
E.g. supply, access,
acceptability
Demand
Individual client factors
[age, sex, education, occupation]
Environmental factors
[physical, economic,
social, cultural]

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
37

38. Need determination
C 1 and C4 are right decisions
What individual think?
Need care Doesn't need care
What doctors
would say?
Person
need care C 1
problem, the
most worry
some
Person
doesn’t need
care
Problem, e.g..
hypochondrias (Chronic and
abnormal anxiety about imaginary
symptoms and ailments)
c4
38

39. The relation b/n demand, need , supply
,
Quantity
Price
Qn. How can we raise the actual demand so that the equilibrium
quantity demanded will be the same as the needed level?
39

40. What about this?? (how to rise need to demand?)
Demand
Supply
Need
40

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
41

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

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
43

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
44

45. Comparisons individual perception of quality?
High quality poor quality
Medical
definition
of quality
High qualityC 1
C2: E.g.. Waiting
room problem
C3: Poor
quality
Eg.Placebo, injection c4
45

46. Demand and quality
Determinant of demand that demand special attention is
quality of medical service
High quality
Low quality
Low quantity High quantity
Demand curve
46

47. Market equilibrium
Information is a vital ingredient for any market.
Both buyers and sellers need to have access to
sufficient information to allow them to make rational
decisions.
Market price is set by the interaction demand and 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.
47

48. Market equilibrium
Quantity
Price
S
D
EQULIBRUM
48

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;
49

50. Excess supply = Q
s
- Q
D
supply
demand
price
quantity
p = $3
Q
D
Q
S
EXCESS SUPPLY
50

51. Excess demand = Q
D - Q
S
supply
demand
price
quantity
p = $1
Q
D
Q
S
51

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.
52

53. 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.
53

54. Thank You
54