Week 6 Flashcards
identify the relevant economic unit of demand analysis, and the product (commodity) to be analyzed.
When analyzing demand behavior, our attention focuses on the quantity demanded by consumers of a specific good or service. To perform the analysis, we use a demand model that serves two purposes: It provides a categorization of the separate factors that might cause demand or quantity demanded to increase or decrease, and it provides a specific hypothesis about how economic factors (e.g., price and income) influence demand or quantity demanded.
Quantity demanded
The quantity of goods or services that an individual or group is willing to buy at one specific rate during a specified time; a change in quantity demanded refers to a movement along a given demand curve in response to a change in price.
Demand Curve
A schedule indicating the quantities of a service that an individual or group is willing to purchase at different prices of that service, all other factors (income, tastes, other prices) held constant.
Demand
Consumer willingness to purchase alternative quantities of services at various specified prices, represented by the position of the demand curve.
Direct price
The price that is directly paid for healthcare services by the consumer and is not subsequently recovered from an insurer or government. The out-of-pocket price is the burden that falls directly on the consumer as a result of his or her use of medical care.
outline two hypotheses used to predict how quantity demanded will change when direct price changes.
With this background, the demand hypothesis used to predict the effect of a change in direct per-unit price on the quantity demanded of a good or service can be presented. The hypothesis is that the lower the out-of-pocket price (the endogenous variable) offered to consumers (all other factors held constant), the greater the number of units of that good or service they will demand
The demand hypothesis predicts that when direct consumer price falls, the quantity demanded will increase.
The needs hypothesis predicts that when the direct price falls, the quantity demanded will remain the same.
present the demand hypothesis in graphical terms and identify a shift in the demand curve.
A rightward shift signifies an increase in demand (after the shift, the quantity demanded will be greater at every price); a leftward shift signifies a decrease in demand (after the shift, the quantity demanded will be less at every price).
The variables that may cause a shift in the demand curve include the following:
- Population—an increase in population will increase the demand.
2. Incomes—in general, an increase in income will increase the demand for eye examinations—people with higher incomes will demand them more often.
3. Prices of complements—complements for eye examinations by optometrists include eyeglasses, which are consumed together with eye examinations. A fall in the direct price of eyeglasses will increase the demand for eye examinations.
4. Prices of substitutes—a substitute would be an eye examination by an ophthalmologist (an MD). An increase in the direct price of ophthalmological examinations would shift the demand curve for optometrist visits to the right.
Income - The income of the consumer is generally assumed to be positively related to demand. That is, if income increases, the quantity demanded at each price will be greater if the good or service is a normal good. If the good or service is inferior, then the increase in income will result in a decrease in demand, other factors being equal.6. Prices of Related Good and Services - The demand for a particular good or service is also influenced by the quantities of related goods and services consumed. The quantities of these related goods and services are, in turn, influenced by their prices. Two classes of good and service relationships are of concern to us: complements and substitutes. A complementary good or service is one whose use is generally accompanied using the good or service in question. 7. Tastes - Consumer taste is a catchall category covering many other factors that might influence demand. Tastes have sometimes been called wants, a term connoting the intensity of desire for goods and services. The elements that influence the intensity of an individual’s desire for medical care include health status, educational background, gender, age, race, and upbringing. Expectations - Consumers’ expectations about the future may impact current demand for a good or service. For example, if consumers expect their incomes to be higher soon, then they may purchase more goods and services currently and save less.
- define supplier-induced demand and explain how a patient’s demand for medical care might be influenced by a physician.
Supplier-induced demand refers to the direct influence of a patient’s tastes by a supplier, say a physician. There is little doubt that such influence exists. Indeed, patients often go to doctors so that they can be told exactly what medical services they need. This being the case, supplier-induced demand acts like advertising: it allows physicians to induce an increased demand for their services.
A favorable change in tastes shifts the demand curve to the right, while an adverse change in tastes shifts the demand curve to the left.
predict the effect of the number of people in the market on the market demand curve.
To generalize the model to explain market demand, we must make an additional assumption. (By “market” we mean the network of buyers and sellers of a good or service.) The assumption is that the more individuals there are who seek the product, the greater will be the market demand and the quantity demanded in the market at any price.
Given the three individual demand curves, the market quantity demanded at a given price will be the sum of the quantities demanded by all three individuals at that price.
We can now divide the factors influencing market demand into two categories: (1) factors influencing individual demand only and (2) factors influencing market demand.
derive the individual demand hypothesis from basic assumptions.
Utility is a key concept in understanding why price must be lowered in order for the quantity demanded to increase. The demand for medical care involves maximizing the marginal utility per dollar spent on medical care and goods. As the out-of-pocket price of medical care increases, the individual demand hypothesis suggests that the quantity demanded for medical care will decline
define and use the concepts of point elasticity and arc elasticity and identify the data that would be needed to measure the arc elasticity of medical care.
- The concept of elasticity is central to economic measurement. Demand elasticity provides a measure of consumer responsiveness to direct price. Note that elasticity is based on relative changes, and is expressed in percentages.
2. When measuring the demand elasticity for medical care, remember that elasticity is measured in terms of the price facing the consumer—that is, the out-of-pocket price.
3. If the demand curve shifts, it is not correct to refer to the response to a price change as elasticity, because you have moved from one demand curve to another. To determine elasticity, you must first hold all variables (other than direct price) constant.
To measure elasticity along a single demand curve, be sure that no relevant variables other than direct price have changed.
define copayment and explain how a copayment will cause the quantity demanded to change.
Copayments are a means to control health care expenditures and are most often employed in the market for prescribed drugs. The following article by Sketris and colleagues (2003) describes the policies and outcomes associated with regulation of this important sector of our health care system in Canada.
predict, given a specific arc elasticity, how quantity demanded will change because of a given change in price.
- In this section, we use the elasticity formula to make predictions. This formula is a very valuable tool, and we have estimates of demand elasticity from various studies. Using this information, economists can make predictions on how the demand behavior of consumers will change when direct price changes. This information can be extremely valuable to both managers and policy makers.
