Farid Abolhassani A Simple Model of Demand 3

Learning Objectives After working through this chapter, you will be able to: Define the term ‘quantity demanded’ Show graphically how changes in demand factors influence the demand curve and therefore service use Define consumer surplus and explain why it can be used as a measure of benefit List the factors which influence the demand for health care Describe how demand theory can be used in health service planning

Key Terms Complements: Goods used along with an identified good. Consumer surplus: The difference between what a consumer pays for a good and the maximum they would be willing to pay for it. Demand curve: A graph showing the relationship between the quantity demanded of a good and its price when all other variables are unchanged. Inferior goods: Goods for which demand decreases as income increases. Law of diminishing marginal utility: A hypothesis that states that as consumption of a good increases so the marginal utility decreases. Normal goods: Goods for which demand increases as income increases. Substitutes: Goods that can be used in place of other goods.

Demand and Wants (Definition) To demand something, you must: Want it Be able to afford it Have a definite plan to buy it Demand amount of money Demand : The amount of money purchasers are prepared to pay for a commodity Wants unlimited desires Wants : The unlimited desires or wishes that people have for goods and services

Determinants of Demand The price of the good The prices of related goods Income Expected future prices Population Preferences

The Law of Demand The law of demand The law of demand : Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded Quantity Demanded Quantity Demanded : The exact quantity demanded at a particular price, or a particular point on a demand curve. Demand Curve

Demand Schedule

Marginal Benefit Marginal Benefit (Pounds per tape)

A Change in Demand Movement along versus a shift of the demand curve A change in demand versus a change in quantity demanded Movement along versus a shift of the demand curve A change in demand versus a change in quantity demanded

Determinants of Demand The price of the good The prices of related goods: Substitutes Complements Income Expected future prices Population Preferences

Individual Demand and Market Demand Curves

Budget Line Assumptions Each individual has a given amount of income to spend Everyone consumes all the goods they purchase within the relevant time period Individuals cannot influence the prices of the goods and services they buy

Consumption Possibilities

Budget Line

Total Utility

Total and Marginal Utility diminishing marginal utility The principle of diminishing marginal utility

Utility-maximizing Combinations

Efficiency, Price and Value Prices Film 6 Cola 3 CommodityQuantityTotal Co. Ut.MUMU/PCostTotal CostTotal Utility Cola Cola Cola Cola Film Cola Film Cola Cola Cola Film Cola Efficiency = Maximizing utility

Equalizing Marginal Utility If the marginal gain from an action exceeds the marginal loss, take the action

Equalizing Marginal Utilities per Pound Spent

Marginal Benefit The maximum price that a consumer is willing to pay for an extra unit of a good or service when utility is maximized

Adam Smith’s Paradox Water, which is essential to life itself, costs little, but diamonds, which are useless compared with water, are expensive

Consumer Surplus Definition: The value placed on goods by consumers minus the cost to the consumers

Consumer surplus – an example Before campaign After campaign

Determinants of Demand for Health Care Need (as perceived by the patient); Patient preferences; Income; Price/user charge; Travel cost and waiting time; Quality of care (as perceived by the patient)