2 - Demand and Supply in Healthh Care

De m a n d a n d
S up pl y i n H e a l t h
Care
02/06/2024 Ass.Professor;Dr.Tefera Tezera
Session Objectives
 Define what is demand
 Describe the determinants of demand
 Discuss the determinants of supply
 Explain the Equilibrium of supply & demand
 Describe determinants of demand Elasticity
 Identify determinants of Supply Elasticity

The Basic Decision-Making
Units
 A firm is an organization that transforms resources
(inputs) into products (outputs). Firms are the
primary producing units in a market economy.
 An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking a
new idea or a new product and turning it into a
successful business.
 Households are the consuming units in an
economy.

DEMAND IN HEALTH CARE
 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.
The Law of Demand
 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.

Demand terms…
 Demand schedule : is a table that shows the
relationship between the price of a good and the
quantity demanded
 Demand curve : graphs the demand schedule. The
demand curve slopes downward

Point Price per game Market
Demand
100
A 20 birr 700g sugar
D B 40 birr 500g sugar
80 C 60 birr 400g sugar
D 80 birr 200g sugar
C
60
Price ( per game)
B
40
A
20
0
0 100 200 300 400 500 600 700 800
Quantity (grams)
Factors influencing consumer
demand
 The price of the good
 The price of substitutes
 The price of the compliments of the good
 Change in income of consumer
 Change in taste 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
demand will change.
Shifts in Demand
 Substitutes
 Substitutes are goods that can serve as replacements
for one another. 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. Perfect
02/06/2024
substitutes areAss.Professor;Dr.Tefera
identical products. Tezera
Shifts in Demand…
 Complements
 Complements are goods that “go together”. Two
goods are complements when a change in the
price of one causes decrease change in the
demand for the other and vice versa.
 E.g. sugar and milk, Car and Engine, etc.

Shifts in Demand…
 Normal (necessity) Goods
 Goods for which demand rises as income rises,
most goods are normal goods. Foods, shelters,
etc.
 Inferior Goods
 Goods for which demand falls as income rises

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.
Shifts in the Demand Curve
Increase
in demand
Price
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity
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.
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

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.

Types of Need
Normative need
 Normative need 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.

Types of Need…
Felt need
• 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.
 Felt need also affect health planning

Types of Need …
Expressed need
 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. E.g. A service is free, but distance,
language, cultural, long waiting period ,cost of travel etc. A
religious or cultural factor may prevent a woman from
practicing birth control
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. Eg: One region practices flouridation of
water supply—while the comparison community does not.
The population of the second community in need of that
service

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 is to factors such as a change in price.
 A change in any of the demand determinants will cause
a change in quantity purchased of a good/ time period.
 The main measures are:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
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 (e) – the percentage change in
the quantity demanded in response to a given percentage
change in the price.

Price Elasticity of Demand …
 Formally,
Q
%Q Q Q p
  
%p p p Q
p
 where D indicates change.
 Example
 If a 1% increase in price results in a 3% decrease in quantity
demanded, the elasticity of demand is e = -3%/1% = -3.
Ass.Professor;Dr.Tefera Tezera
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).
Price Elasticity of Demand …
(a)
Perfectly Elastic Demand (b)
Perfectly Inelastic Demand
ice per unit

ice per unit
p, Pr
p*
p, Pr
,Q
Units per time period Q* ,Q
Units per time period

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.
Income Elasticity of 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 unchanged.
 Normal goods have a positive income elasticity.
 Inferior goods have a negative income elasticity
 Necessities are income inelastic. Examples: food, fuel,
clothing, utilities, medical care.
 Luxuries are income elastic. Examples: cars, jewelry,
gourmet foods.
Cross Elasticity of 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).

Cross-Elasticity of
demand…
 Positive cross-elasticity  substitutes
 Higher positive elasticity  higher substitution
effect
 Negative cross-elasticity  complementary
 Higher negative elasticity  higher
complementary effect

Factors affecting elasticity of
demand
 Nature of commodity
 Availability of substitutes
 Multiple uses
 Position of the commodity in consumers budget
 Time factor
 Habit
 Price change
 Income group

Features of price elasticity of
demand
Features Elastic goods Inelastic goods
A rise in price A large fall in A smaller fall in

demand demand
Number of substitutes Many Few
Type of good Luxury Necessity
Price of good Expensive Cheap
Example Car Food items

Supplier-Induced Demand
 In health care, an agency relationship exists between the
patient and the physician.
 Due to lack of knowledge regarding the diagnosis and
treatment needs, the patient must rely on the physician
for advice.
 When the physician acts as a” perfect agent” for the

patient, then the physicians recommendations would be
similar to what the patient would decide, if the patient
had the physicians expertise.

…
 The physician would consider the patient’s medical
condition, income, insurance coverage, out of pocket
prices for different treatment settings, preferences and
so on when making a treatment recommendation.
 The physician, however is a supplier of both advice
and a service.
 As such, there is a concern that because the physician
has financial interests in supplying services, the
information provided to the patient should be biased.

…
 When the physician modifies the diagnosis and treatment
recommendations to include a favorable effect on his own
economic well being, then physician is an imperfect agent.
 In a fee for service payment system, this imperfect agency
relationship has been referred as supplier induced demand.
 The lack of patient information together with extensive
coverage have reduced patients sensitivity to physicians
prices and have given rise to the idea that physicians can
both induce their own demand and set their own prices .
 In its simplest form, demand inducement is an extreme
example of monopoly power
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
SUPPLY IN HEALTH
CARE
 Supply means, the quantity of goods or services a
seller is willing to produce and sell.
 The amounts of a good producer 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.

The Law of Supply
6  The law of supply states
Price of soybeans per bushel ($)
5 that there is a positive

4 relationship between
3
price and quantity of a
2
1
good supplied.
0  This means that supply
0 10 20 30 40
Thousands of bushels of soybeans
50 curves typically have a
produced per year positive slope.

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.
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.

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.

Market Equilibrium
 Only in equilibrium is
quantity supplied equal
to quantity demanded.
• At any price level

other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibrium
 Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds quantity
supplied at the current price.
• When quantity
demanded exceeds
quantity supplied, price
tends to rise until
equilibrium is restored.
Market Disequilibria
 Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.
• When quantity supplied exceeds quantity
demanded, price tends to fall until
equilibrium is restored.
Thus, a surplus creates downward pressure on the price, and a

shortage creates upwardAss.Professor;Dr.Tefera
02/06/2024
pressure on the price
Tezera
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.

Determinants of Supply
Elasticity
 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 would be elastic.

Elasticity….
 Spare Capacity
 If the firm has a 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.

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
02/06/2024 supply. Ass.Professor;Dr.Tefera Tezera
Features of price elasticity of Supply
Features Elastic goods Inelastic goods
A rise in price A large increase in A smaller increase

supply in supply
The good is produced Rapidly Slowly
The time period Days Months
The firm has Larger stocks Limited stocks
Example beef Screws

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.

Shifts in the Supply Curve: What causes them?
Supply curve, S3
Supply
curve, S1
Supply
Decrease curve, S 2
in supply
Price
Increase
in supply
0 Quantity
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.


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De m a n d a n d

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

 Demand analysis seeks to identify which

 Need in medical care exists when an individual has

02/06/2024 Ass.Professor;Dr.Tefera Tezera

 Utilization occurs when the individual actually acts

02/06/2024 Ass.Professor;Dr.Tefera Tezera

 E.g. pre natal care, immunization, management of

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

ice per unit

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

Features Elastic goods Inelastic goods

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

02/06/2024 Ass.Professor;Dr.Tefera Tezera

 When the physician acts as a” perfect agent” for the

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

Environmental factors Health care resources

02/06/2024 Ass.Professor;Dr.Tefera Tezera

5 that there is a positive

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

• At any price level

Thus, a surplus creates downward pressure on the price, and a

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

Features Elastic goods Inelastic goods

A rise in price A large increase in A smaller increase

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

02/06/2024 Ass.Professor;Dr.Tefera Tezera

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