Lecture 6 Flashcards
What does demand refer to in economics?
The relationship between the amount of a good that consumers are willing and able to buy at various prices.
Why is analyzing demand important?
- To predict consumer behavior and likely reactions.
- Demand for health care may say something about how much they value a good
For example, if a charge is introduced for a drug or a test, what will be the effect on the number of people using that drug or test?
Can you give an example of analyzing demand?
Predicting the impact of introducing a charge for a drug or a test on consumer usage.
What can knowledge about people’s demand for health care inform?
Policy decisions on subsidies
Why do consumers have to make choices?
Limited income and scarcity
What is the concept of willingness to pay?
Households’ preparedness to spend a certain amount on a product
For example, my willingness to pay for a packet of Panadol at a particular moment in time might be that I am prepared to spend 5 LE. If Panadol is currently selling at 7 LE then despite the fact that I have a demand for Panadol, no transaction will take place. If, however, panadol is available at 5 LE (or less) then a transaction will take place
When will a transaction take place?
When the price is equal to or lower than households’ willingness to pay
What is quantity demanded?
The amount that households are willing and able to buy
What are the determinants of demand on health care?
Inputs of the Quantity demanded fn
P, Y, Ps, Pc, T
P = price of the good
Y = income
Ps = price of substitute goods
Pc = price of complementary goods
T = tastes or preferences
What is the function that represents quantity demanded?
Qd = f (P, Y, Ps, Pc, T)
How does price affect the quantity demanded?
Inverse relationship
E.g. If Panadol is priced at 1 LE per pack, you might be prepared to buy more per year than if it were priced at 10 LE per pack.
How does income affect the quantity demanded of a good?
Positive relationship
The amount demanded is also related to the size of a consumers income
The higher your income, the more likely it is that more of a good will be demanded at any given price. Therefore, if your income falls, you might consume less Panadol per year.
What is one of the determinants of demand on health care?
Price of substitutes and complements
For example, if the price of Panadol remains fixed at 5 LE per pack, but the price of a substitute good, say aspirin, falls, you may now purchase less Panadol per year than before as it is now relatively less attractive
What are substitute goods?
Goods that can be used instead of your good
What are complementary goods?
Goods bought in conjunction with your product
(e.g. a syringe and a needle)
How does the demand for your good change if the price of a substitute good increases?
Demand for your good may increase
How does the demand for your good change if the price of a complementary good rises?
Demand for your good may fall
How can an allergic reaction to Panadol affect the demand for it?
The price you are willing to pay for Panadol is also a function of your tastes or preferences.
Demand will decrease
What is the law of demand?
As price increases, demand falls
Each point on the curve relates to the quantity demanded at a different price
Why do demand curves slope downwards?
Consumers buy more as price falls
What is the quantity demanded at a price of 5 LE knowing that the quantity demanded at a price of 10 LE is 3 packs per year?
4+ packs a year
What is the maximum number of packs the individual would take even if they were given away free of charge?
7 packs
What are the two main effects that cause the demand curve for Panadol to slope downward?
Substitution effect and income effect
What is the substitution effect?
Consumers adjusting consumption in response to a price change.
For example, if the price of Panadol rises, consumption of Panadol falls and the consumption of other advils like Aspirin tends to rise. There is no reason to believe that the satisfaction consumers gain from Panadol or Aspirin has changed. However, the switch in demand occurs because the satisfaction obtained per pound (LE) spent on Panadol falls in relation to a pound spent on Aspirin.
Can you give an example of the substitution effect?
When the price of Panadol rises, consumption of Panadol falls and consumption of other advils like Aspirin tends to rise.
What is the income effect?
Buy less of a good when its price rises to have enough income for other goods.
When the price of a good rises (such as Panadol), if you continue to buy the same amount as before, you will have less income available to buy other goods. So, the rise in the price of Panadol is similar to a fall in real income
Income effect:
What happens when the price of a good rises?
Less income available for other goods.
What are the two effects that give a downward sloping demand curve?
Income effect and substitution effect.
What would be the effect of the health education campaign on the quantity demanded of dental services?
Suppose that there is a health education campaign to highlight to the general public the benefits of regular dental check-ups (for which people must pay directly)
The quantity demanded of dental services would increase.
The demand curve shifts to the right
The health promotion program, if effective, will result in an increased preference for dental check-ups.
Suppose that the dental clinic relocates to an area outside the city
What would be the impact on the quantity demanded or the demand curve?
The quantity demanded would decrease and the demand curve would shift to the left.
If the clinic becomes more distant from the people, then this means that travel to the clinic becomes more expensive in terms of time and transport costs.
What can travel to the clinic be considered as?
Complement to the check-up
The increasing cost of travel will result in a decrease in quantity demanded for the check-up at all prices.
How does the increasing cost of travel affect the demand for the check-up?
Decreases the quantity demanded at all prices
Demand and Utility
What does allocating our incomes across a wide range of goods reflect?
An attempt to maximize utility
What does maximizing utility reflect?
Our preferences
What is total utility?
Total satisfaction from consumption
What is marginal utility?
Change in total utility from one unit increase
What is diminishing marginal utility?
Utility obtained from each extra unit tends to fall
How can utility be maximized?
By ensuring that the ratio of marginal utility to price is equal for all goods.
According to utility theory, when deciding how to allocate your income across different goods, utility is maximized when: MU A /P A = MUB /PB = MUC /PC
What is the condition for maximizing utility?
MU A /P A = MUB /PB = MUC /PC
What does MU stand for in utility theory?
Marginal utility
What is the key difference between health care and other goods in terms of utility?
Health care does not yield utility directly.
The value of consuming health care comes from the positive effect one hopes it has on health
What is the value of consuming health care derived from?
The positive effect on health and the activities one can do when healthy.
The satisfaction we derive from the activities we can do when we are healthy (that is, working and leisure activities)
What is the demand for health services considered to be?
A derived demand.
What does each point on an indifference curve represent?
The same utility from consuming different combinations of two goods.
What does an indifference curve represent?
All possible combinations of two goods that a person is indifferent between.
What is the slope of an indifference curve?
The marginal rate of substitution.
It is the amount of one good (e.g. X) that has to be given up if a person is to obtain one extra unit of the other good (e.g. Y)
What does the marginal rate of substitution measure?
The amount of one good that has to be given up to obtain one extra unit of the other good.
What is the name of a diagram that can draw more than one indifference curve?
indifference curve map
The general rule is that indifference curves further to the right show combinations of the two goods that yield a __________
Higher utility
Demand and Utility
What is the Budget Line?
It illustrates all the possible combinations of two goods that can be purchased at given prices with a set budget.
Budjet Line:
The amount of a good that a person can buy will depend on what?
income and the price of the good
What is the budget constraint Equation?
Y = (P_m)M + (P_c)C
- M = medical care or all health inputs.
- C= consumption all other goods
- Pm is the price of medical care or all health inputs.
- Pc is the price of the consumption goods
- Y is income
Budget Line
What is plotted on the Horizontal axis and the Vertical axis respectively
- Health inputs (e.g. medical care)
- Consumption of all other goods
The horizontal intercept namely is **Y/Pm **and the vertical intercept namely is Y/Pc
Demand and utility
What happens when price of
medical care increases ?
- BC becomes steeper
- Now at E3
- Consume less medical care
- Consume more of all other goods
Demand and utility
What happens when the
income increase ?
- The budget line shifts to the right
- Now at E3
- Consume more of medical care and all other goods
