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Demandinhealthcare 111220081932 Phpapp01
Demandinhealthcare 111220081932 Phpapp01
1
Outline
• Demand & purpose of demand analysis
• Need, want & demand
• Michel Grossman model of demand for health
• Factors affecting demand for health
• Distinctive characteristics of health sector
• Law of demand, demand schedule & curve
• Economic factors that affect demand for health
• Equilibrium of demand & supply
• Elasticity of demand
• Factors affecting elasticity of demand
• Elastic & inelastic demand curves 2
Demand
• Demand describes the behavior of consumers. It
does not mean the desire to obtain something
(Health care)
• The hungry man who can not pay for food has no
demand for it
Need Demand
Someone's subjective Objectively observable as
idea behavior in the market.
(may be based on a Money is a key factor.
formula applied "Demand" is also called
objectively, but the choice "effective demand,"
to use the formula was because it's expressed
someone's subjective only by spending money.
idea.
Money is not a factor.
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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
Individual/client factors
[age, sex, education, occupation]
Prepayment factors
E.g. private insurance, tax based health
Insurance, national health system,
Out of pocket payment
10
Grossman’s demand model…
According to this model every one inherits a
stock of health when born
– Non-profit motive
– Restrictions on competition
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Distinctive characteristics of health
sector…
Price
P1
P0
q1 q0
17
Other Economic Factors
Affecting Demand…
1. Income
• If income increases, then at any given price,
consumer is willing and able to purchase more q
Price
DO D1
P0
18
q0 q1 Physician Visits
Other Economic Factors
Affecting Demand…
2. Complements - 2 or more goods which
are consumed together
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Other Economic Factors
Affecting Demand…
2. Complements
• e.g. contact lenses and optometrist visits
• If contact lenses become cheaper, demand for
optometrist visits will increase
Price
Price of complement
falls
D0 D1
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Optometrist Visits
Other Economic Factors
Affecting Demand…
3. Substitutes - other goods which satisfy the
same wants, or provide same characteristics
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Other Economic Factors
Affecting Demand…
3. Substitutes - other goods which satisfy the
same wants, or provide same characteristics
• e.g. generic and brand name drugs
• If generic drugs in price, D for brand name will decrease
Price
Demand for brand name
drug falls
D1 D0
22
Brand name drugs
Equilibrium of supply and demand
• Market equilibrium occurs when two economic
variables [supply and demand] are in balance
23
Equilibrium of supply and demand…
• At the equilibrium, price and quantity tend to stay
same as long as other things remain equal
25
Elasticity
• In economics elasticity refers to the ratio of the
relative change in a dependent variable to the
relative change in an independent variable.
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Factors affecting elasticity of
demand
• Price change
• Availability & price of substitutes
• Availability & price of complements
• Income change
• Nature of commodity
• Multiple uses
• Deferred consumption
• Position of the commodity in consumers budget
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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
# Visits
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Elasticity…
Price In this case demand is
considered to be relatively
“elastic” with respect to a
change in price
# Visits
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Elasticity…
Price A relatively steep demand curve
implies that a small increase in
price leads to a small fall in #
visits demanded
# Visits
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Elasticity…
Price In this case demand is
considered to be relatively
“inelastic” relative to a change
in price
# Visits
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Elasticity…
Price Elasticity of Demand:
% ∆ Q D % c h a n g e in q u a n tity d e m a n d e d
ED= =
% ∆P % c h a n g e in p r ic e
• Example: If the elasticity of demand for
physician visits is -.6, a 10% increase in price
leads to a 6% decrease in the number of visits
demanded
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Elasticity…
• ED is expected to be negative. Thus, price
elasticities of demand are often quoted in
terms of absolute value
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Insurance…
Price
cP
q qc # Visits
Price
cP
q qc # Visits
Price
$150
D1
D0
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Visits
Estimating Demand for Medical Care
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Empirical Evidence
• Demand for primary care services
(prevention, early detection, &
treatment of disease) has been found to
be price inelastic
– Estimates tend to be in the -.1 to -.7 range
– A 10% ↑ in the out-of-pocket price of
hospital or physician services leads to a 1
to 7% decrease in quantity demanded
– Ceteris paribus, total expenditures on
hospital and physician services increase
with a greater out-of-pocket price 43
Empirical Evidence…
• Demand for other types of medical care
is slightly more price elastic than
demand for primary care
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Out-of-Pocket Payments in the U.S.
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The end!
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