![36
Michel Grossman’s Model Demand determinants
Prepayment factors
E.g. private insurance, tax based health
Insurance, national health system,
managed care, co-payment
Health care resources Factors
E.g. supply, access,
acceptability
Demand
Individual client factors
[age, sex, education, occupation]
Environmental factors
[physical, economic,
social, cultural]](https://image.slidesharecdn.com/session3-5modelsofdemand-240814185356-ea215ea5/85/Session-3-5-Models-of-Demand-for-health-ppt-36-320.jpg)
Session 3-5 Models of Demand for health.ppt
- 1. Chapter: 3. Needs, consumption, demand Demand as a function of price Elasticity 4. Supply, production Supply as a function of price Elasticity of supply Production 5. Principles of health care demand Health care need Health care demand Health care utilization Relationship between need, demand, supply & utilization Role of economic policy Demand and quality of service 1
- 2. What is m What is market? Is any set of arrangement by which buyers and sellers of a commodity interact to determine its price and quantity. Who are buyers in health care system? Every body is potentially a buyer or consumer of health care Who are the seller of Health Services People who provide medical and health services are the sellers. 2
- 3. Demand…….What is demand? Demand…….What is demand? Demand is the amount of a good (service) buyers want to purchase at different prices during same stated period of time. Demand is expressed only by spending money Need is some one subjective idea and money is not a factor, but demand is objectively observable behavior in the market Demand = Need + ability and willingness to buy a good. Question:-What is the distinction between need and demand? Need Need • Someone's subjective idea (may be Someone's subjective idea (may be based on a formula applied objectively, based on a formula applied objectively, • the choice to use the formula was the choice to use the formula was someone's subjective idea). someone's subjective idea). • Money is not a factor. Money is not a factor. Demand Demand • Objectively observable as behavior in the market. Objectively observable as behavior in the market. • Money is a key factor. Money is a key factor. "Demand" is also called "effective demand," "Demand" is also called "effective demand," because it's expressed only by spending money. because it's expressed only by spending money.
- 4. Factors affecting demand for a good or service are: Factors affecting demand for a good or service are: Own price Income of consumers e.g. Normal and inferior goods. Tastes Price of related goods o Complementary goods e.g.. Car Vs gasoline o Substitutes goods e.g. electricity Vs biomass fuel 4 Expectation of future prices and income Income distribution Wealth distribution Other particular factors, etc
- 5. Law of Demand: The law of demand states the quantity demanded of a good/service is inversely related to its price, other things being equal (ceteris paribus). D x=f(P x),Ceteri paribus As price of a commodity increases its quantity demanded will decrease and vice versa Demand Schedule: is the tabular presentation of quantity demanded of a good at different prices. Demand Curve: is graphic presentation of the demand schedule. 5
- 6. • 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 6
- 7. Demand schedule Price per disposable gown in Birr Quantity of disposable gown demanded per day Reference point 1 1 2 2 3 3 4 4 5 5 6 6 60 60 30 30 20 20 15 15 12 12 10 10 A B C D E F 7 Q1 Q2 P2 P1
- 8. Movement along and Shift in Demand Curve Movement along and Shift in Demand Curve Movement along Demand Curve : occurs as a result of a change in price of a good/ services. It is also called change in quantity of demand. Shift in Demand Curve: is caused by non-price factors affecting demand for a good such as income, taste, and population. It is also called change in demand 8
- 9. Contraction of demand Extension of demand Movement along the demand curve Shift of demand curve Q1. What is the factor resulting in contraction of the demand curve? Increase the in price of the good Q2. What is the factor resulting in Extension of the demand curve? Q3. what are the factor resulting in outward shift of the demand curve? Rise in income, An increase in preference, Rise in price of substitute, Fall in price of complement Q4.What are the factors resulting in inward shift of the curve ? 9
- 10. 10
- 11. Elasticity of demand Elasticity provides a way of measuring how sensitive demand is to the determinants. Elasticity of demand measure the responsiveness of demand of a good to a change in determinants. When cost of production is raising the cost the firm will pass the increment cost to the consumer price. But the beneficiarieness depend on: 1/Price elasticity demand for the product ; Proportionate change in demand to proportionate change in price 11
- 12. 2/ Price elasticity of the substitute, the price of the substitute also matters; Raising price is only important if demand of the product is less elastic and the demand of its substitute is much less elastic. • Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. • Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa. 12
- 13. Some measures of demand elasticity:- 1.Price elasticity of demand 2.Cross elasticity demand 3. Income elasticity demand 13
- 14. 1. Price elasticity of demand (PED) Price elasticity of demand = % change in quantity % change in price Ed= Q%/ P% Percentage change quantity of demand to one percentage change in price • Ed- The value of PED is always negative reflecting the inverse relationship between price and quantity demanded. Elasticity’s are scale free. 14
- 15. Different type of price elasticity of demand; Price inelastic= demand is not particularly sensitive to change in price Price elastic =demand is particularly sensitive to change in price Coefficient of Ed Type of Ed Shape of the Demand Curve Ed=0 Perfectly inelastic Dv is vertical 0<Ed<1 Inelastic Dv is steeper Ed=1 Unitary elastic Dv is 45 degree angle 1<Ed<infinity Elastic DV is Flatter Ed=Infinity Perfectly elastic DV is Horizontal 15
- 16. Graphically; Quantity Price Ed infinity 1<Ed< infinity Ed =1 Ed= o 0<Ed<1 16 Example 1. if the price heart operation rose by 15% and the quantity fall bout by 10% 1. What is the coefficient of Ed 2. What is the type of Ed type? 3. Describe what the coefficient value of the Ed means
- 17. Class activity When the price of heart operation rise by 10% the demand fall from 800 to 600. Calculate the price elasticity of demand and give your explanation on the coefficient of Ed 17
- 18. 2.Income elasticity demand(YED) Measure demand react to change in income YED= % change in quantity % change in income Unlike price elasticity which is always negative with some exception when the goods are inferior , income elasticity is always positive with the exception when the goods are inferior This is because when the good is inferior people switch over to the superior good by leaving the inferior good E.g. when income rises people prefer to buy more meat and less potato. 18
- 19. 19
- 20. 3.Cross elasticity of demand(XED) Measure how demand react to change in price of other goods XED = % change in quantity % change in price of other good If the price elasticity of demand is positive it indicate the goods are substitutes If it is negative, then the goods are complement 20
- 21. 21
- 22. The purpose of analysis of demand in health care Is to determine those factors which, on the average, most affect a persons utilization of medical services. The better our understanding of those factors, the better we will be able to explain variation in utilization among population groups and among areas 22
- 23. The Supply Supply is the amount of a good producers/sellers are willing to produce and sell at different prices. Factors Influencing the supply of a good or service: Own price Production (inputs) cost production technology price of substitutes Future expectations Market structure/organization Government policy 23
- 24. Law of supply Law of supply states that the quantity supplied of a good is positively related to its own price, ceteris paribus. Sx= f(Px), Ceteris paribus Supply Schedule Supply Schedule: is the tabular presentation of what quantity of a good will be supplied by the producer/seller at different prices. Supply Curve Supply Curve: is graphic presentation of the supply schedule. 24
- 25. Supply Schedule Price of Hip Replacement Br. 2000 2500 3000 3500 4000 4500 Quantity Hip Replacement Supplied by the Hospital 1000 2000 3000 4000 5000 6000 25 Price Quantity Fig The supply curve s
- 26. Explanation of some of the factors affecting the decision of supply; 1. Cost of production… dominant factor When production cost is high relative to price, producer will produce little 2. Price of substitutes If the price of one substitute rises, this will decrease the supply of other substitute 3. Market organization Monopolized market tend to raise the price at each level of the out put 26
- 27. Price Supply Supply Price Fig. Movement along the supply curve: occurs as a result of a change in price of a commodity. Eg. Maximizing profit Fig. Shift in supply curve Assignment: what shifts supply curve in and out ward? Eg. Change in cost of production s s in supply in supply 27
- 28. Elasticity of supply Price elasticity of supply(PES) measure how sensitive quantity supplied to change in price PES= % change in quantity supplied % change in price of the good PES= Q%/ P% PES is always positive PES is more elastic over time; this implies the time it take to switch resources in to the other market. 28 Work on cross elasticity of supply!
- 29. The supply of health care 29 Three peculiarities (unusual) of the supply of health care complicate its analysis: Complexity of Product: health care is not a simple product, but a related bundle of goods and services directed towards the same objective of improving health. In many cases these goods and services are joint products and the supply and costs of one are not independent of the others. They also have a quality dimension that is difficult to measure objectively
- 30. Health Production Health Production is the transformation of inputs in to out puts. Production function is the physical relationship b/n the inputs and outputs of the products. Is the process of getting maximum out put from a given quantity input in particular period of time 30
- 31. Health care demand The ability and willingness to given price of acquire a certain health care services at certain point in time, According to Grossman the demand for health has two reasons; 1. Pure conception aspect--health is desired b/c it makes people feel better 2. Pure investment aspect---it increases the number of health days available to work and to earn income 31
- 32. Demand… Demand analysis seeks to identify which factors are most influential in determining how much care people are willing to purchase The major purpose of demand analysis for medical care is to determine those factors which afffect utilization of medical services The decision to use health care reflects a combination of normative and felt need. Despite a wide variety of empirical methods and data sources, the demand for health care is consistently found to be price inelastic. 32
- 33. Although the range of price elasticity estimates is relatively wide, it tends to center on –0.17, meaning that a 1 percent increase in the price of health care will lead to a 0.17 percent reduction in health care expenditures 33
- 34. Demand of health care Poor physical access, the perceived efficacy and quality of care are important influences over the decision to demand In general, the demand for health is found to be income inelastic.( How do you see this??) The estimates of income elasticity of demand are in the range of 0 to 0.2. 34
- 35. Determinants of demand The relative importance of some of the factors influencing demand may differ from theory. For example, where beliefs about illness causation imply certain treatment options, price and income are much less important in health care utilization decisions. These beliefs might be incorporated in item theory of the demand function ('the organizational and institutional structure of society, preferences and tastes'). In practice, however, it is difficult to account for them and adequately to include them in health care demand analysis 35
- 36. 36 Michel Grossman’s Model Demand determinants Prepayment factors E.g. private insurance, tax based health Insurance, national health system, managed care, co-payment Health care resources Factors E.g. supply, access, acceptability Demand Individual client factors [age, sex, education, occupation] Environmental factors [physical, economic, social, cultural]
- 37. Health care need Estimation of the required type & volume of resources and services to provide based on the professional judgment It doesn’t consider the price The health need determined in two ways, from the professionals perspective and individual own perspectives 37
- 38. Need determination C 1 and C4 are right decisions What individual think? Need care Doesn't need care What doctors would say? Person need care C 1 problem, the most worry some Person doesn’t need care Problem, e.g.. hypochondrias (Chronic and abnormal anxiety about imaginary symptoms and ailments) c4 38
- 39. The relation b/n demand, need , supply , Quantity Price Qn. How can we raise the actual demand so that the equilibrium quantity demanded will be the same as the needed level? 39
- 40. What about this?? (how to rise need to demand?) Demand Supply Need 40
- 41. How to raise the demand to ward the need ? It can be done by the following • Advertisement • Incentive • Free service E.g.. vaccines • Putting scary (Provoking fear or terror) messages or tax ( e.g. on cigarette) • Etc 41
- 42. The relation b/n the demand, need and utilization. People who do not have medically defined health problem or who have problem but do not warrant health care People who have medically defined health care and warrant health care Do not perceive health problem People who perceive health problem , self perceived health problem Do not perceive health problem People who think the problem warrant health care , self perceive health need Think the problem do not warrant health care Seek for preventive care and demand for preventive care Do not seek preventive care Seek for curative care and demand for curative care Do not seek curative care Seek for preventive care and demand for preventive care Do not seek preventive care Obtain P. Care Do not obtain P.care Obtain c. care Do not obtain C.care Obtain P.care Do not obtain P.care A B C D E F 42
- 43. A=Utilization satisfied demand for preventive care B=unsatisfied demand for preventive care C=utilization of satisfied demand for curative health care D=unsatisfied demand for curative care E=Utilization of satisfied demand for preventive health care F=unsatisfied demand for preventive care Supply = utilization ,when supply is constraint Utilization =Demand ,when supply is excess 43
- 44. Demand and Quality Is conformance to requirements Quality of care : the degree to which health service for individuals and populations increase the likelihood of desired health outcomes and are consistent with the current professional knowledge Like need there is discrepancy b/n the quality with in the perception of population and quality measured by medical profession 44
- 45. Comparisons individual perception of quality? High quality poor quality Medical definition of quality High quality C 1 C2: E.g.. Waiting room problem C3: Poor quality Eg.Placebo, injection c4 45
- 46. Demand and quality Determinant of demand that demand special attention is quality of medical service High quality Low quality Low quantity High quantity Demand curve 46
- 47. Market equilibrium Information is a vital ingredient for any market. Both buyers and sellers need to have access to sufficient information to allow them to make rational decisions. Market price is set by the interaction demand and supply Equilibrium means a state of equality or a state of balance between market demand and supply. A price at which excess demand equals zero At the equilibrium price there is no net tendency for price to change. 47
- 49. Equilibrium… Excess demand exists when, at the current price, the quantity demanded is greater than quantity supplied. Excess supply exists when, at the current price, the quantity supplied is greater than the quantity demanded. Graphically they looks the following; 49
- 50. Excess supply = Qs - QD supply demand price quantity p = $3 QD QS EXCESS SUPPLY 50
- 51. Excess demand = QD - QS supply demand price quantity p = $1 QD QS 51
- 52. When there is EXCESS DEMAND for a good, price will tend to rise. When there is EXCESS SUPPLY of a good, price will tend to fall. When excess demand equals zero, price must be the equilibrium price, and we say the market is in equilibrium. 52
- 53. Economists are interested in the explaining equilibrium prices. Market price serves as the adjustment mechanism to move markets to equilibrium. Price changes in response to the existence of excess demand or excess supply. Changes in demand and changes in supply lead to changes in equilibrium prices and quantities. 53
- 54. Thank You 54
Editor's Notes
- #3: Need – basic necessities want- lexjerious/ additional things
- #8: Inward or out ward shift
- #15: If the demand is elastic the total expenditure will change in opposite direction from change in price If the demand is inelastic the total expenditure on the commodity will change in the some direction as price change.
- #16: Answers A. -10% /15%= -0.66 B. Inelastic C. with the percentage change in price there is lesser change in quantity