Demand Flashcards
Define Demand
The relationship between the amount of a good that consumers are willing and able to buy at various prices
What are the determinants of demand?
= f (P, Y, Pc, Ps, T) P = Price of a good Y = Consumer income Pc = Price of complementary good Ps = Price of substitute good T = Tastes and preferences
What does a demand curve show?
What makes a demand curve downward facing?
The relationship between price and quantity demanded.
Generally inverse relationship between price and quantity -> as price increases, quantity decreases and vice versa. Due to:
- Income effect - amount of income available to spend
- Substitution effect - consumers adjust consumption to increase satisfaction per $ spent
What does a movement along the demand curve represent?
A movement along the demand curve (up or down) shows a change in the quantity demanded due to a change in price.
What does a shift in the demand curve represent?
A shift in the demand curve (left or right) shows a change in the demand due to the influence of other variables (income, price of substitute etc.)
Examples:
Tastes and Preferences - public health campaign on dental health increases demand
Income - increase in household wealth means more able to spend money eg. dentist, physio etc.
Other goods - Paracetamol price rises so demand for substitutes like ibuprofen or aspirin increase
Define utility
Including - total utility, marginal utility and diminishing marginal utility
Utility is maximised when ratio of utility (marginal benefit) is equal to the price (marginal cost) for all goods. Each $ spent on the good yields the same marginal utility.
Total utility = satisfaction gained from consuming a good or service
Marginal utility = change in utility/additional utility from a one-unit increase
Diminishing marginal utility = the more we consume a good, the less extra value we obtain from it
Examples in healthcare: screening, painkillers
What is consumer surplus?
Difference between what someone is willing to pay (value determined by the consumer) and the amount they do pay (the price determined by the market – market price)
Essentially ‘profit’ for a consumer – in theory rational consumers will only buy goods that are worth more than they pay for them
How is demand different from a simple model in the context of healthcare?
Healthcare = derived demand (utility does not come from health care directly but the positive effect it has on health); thus more complex than a simple model
Affected by:
- Single one-off interventions
- Decisions delegated to, and influenced by health professional (non-sovereign consumer)
- Heterogenous (different illnesses and interventions)
- Third party payments
What is price elasticity of demand?
Responsiveness of quantity demanded to change in price
How is price elasticity of demand calculated?
The percentage change in quantity demanded divided by the percentage change in price
= % Change in Qty / % Change in Price
= (Change in Qty/Average Qty) / (Change in Price/Average Price)
How do you interpret price elasticity of demand calculations?
E Infinite = Perfectly Elastic
Quantity demanded is infinitely responsive to changes in price
E > 1 Price Elastic
Quantity demanded is responsive to changes in price
Eg. Dental Care
E = 1 Unit Elastic
Change in quantity demanded is equal to change in price
E < 1 Price inelastic
Quantity demanded is unresponsive to change in price
Eg. Insulin
E = 0 Perfectly Inelastic
Quantity demanded is constant regardless of price
What are some determinants of price elasticity of demand?
- Availability of substitute goods (more elastic)
- Income (% of income spent on goods) (more elastic)
- Period of time (more elastic)
- Necessity (more inelastic)
- Who pays (more inelastic)
- Brand loyalty (more inelastic)
How is demand measured?
Demand measured by quantity of services delivered or expenditure on services
Describe the relationship between PED and total revenue
Total revenue = number of units sold (qty) multiplied by price per unit (price)
Price Inelastic –
Price increase, equals total revenue increase;
Price decrease = total revenue decrease
Price Elastic –
Price increase, equal total revenue decrease;
Price decrease = total revenue increase
(gain in revenue for single unit less than gain in total revenue due to decrease in production/qty supplied)
What is the relevance of demand for healthcare planning and policy?
Can be used to reduce unwanted behaviours, increase desirable behaviours and raise revenue
Individual behaviour - Can help predict responses to, and analyse welfare effects of, policy change
Markets – Key building block in understanding how markets operate
