Demand for healthcare and how Suppliers' Induced demand takes place

1. Demand in Healthcare
Brigadier General Dr Zulfiquer Ahmed Amin
M Phil, MPH, PGD (Health Economics), MBBS, Fellow (AIIMS, Delhi)

2. Demand is an economic concept that relates to a consumer's desire to purchase goods and
services and willingness and ability to pay a specific price for them.

3. Relation of Price and Demand
The demand for a good or service is inversely related to its price; as the price increases, the
demand for it decreases, and vice versa.
So, the demand curve is a graphical representation of the relationship between the price of a
good and the quantity demanded, and is downward slopping.
Dx = f (Px)

6. Demand and Supply Curve and Price
A supply curve visually demonstrates the law of supply, that as prices increase, quantity
increases. Thus supply as an upward-sloping curve. While Demand Curve is downward
slopping.
With a supply curve sloping upwards and a demand curve sloping downwards, there is a
point where the two will cross. This is the equilibrium price. At equilibrium, the market price
is sufficient to encourage suppliers to produce the exact quantity that consumers are willing
to purchase at that price. The intersection of these curves marks the market-clearing price at
which demand equals supply.

7. Factors Influence Demand
1. Price: The price of a good or service significantly influences the quantity demanded.
Generally, an increase in price will lead to a decrease in demand and vice versa, assuming all
other factors remain constant. This concept is termed 'the law of demand.'
2. Income Level: The demand for a good or service is often directly related to the income
level of the consumer. Higher income typically results in higher demand for goods and
services and vice versa.
3. Prices of Related Goods or Services: The prices of complementary or substitute goods or
services can influence the demand for a product. For instance, a change in the price of butter
can affect the demand for bread.
4. Taste or Preferences: Consumer tastes or preferences can significantly impact the demand
for a product or service. Trends, lifestyle changes, and marketing efforts can influence
consumer tastes and preferences over time.
5. Expectation of future price.
6. Number of potential buyers.

8. Demand Change
- Responding to price changes is moving along the demand curve and
- Responding to changes in income is the entire demand curve changes and shifts.
Moving along the demand curve Shifting of the demand curve

9. Demand Curve Shifts Left
The demand curve shifts to the left if the determinant causes demand to drop. That happens
during a recession when buyers' incomes drop. That means less of the good or service is
demanded. If originally at price P, quantity Q was demanded, once the demand curve shifts
to the left at the same price P, lower quantity Q1 will be demanded.

10. Left shift in the demand curve will force a decrease in prices and the demand and supply will
intersect at an equilibrium E1. The new equilibrium would have a lower price P1, although
the quality demanded (Q2) would be higher than the temporary increase at Q1 but lower
than the original at Q.

11. Demand Curve Shifts Right
The curve shifts to the right if the determinant causes demand to increase (Increase in
income). This means more of the good or service are demanded even though there's no
change in price. If originally at price P, quantity Q was demanded, once the demand curve
shifts to the right at the same price P, more quantity (Q1) will be demanded.

12. If there are no changes to the supply of that item, ultimately a right shift in the demand curve
will force an increase in prices and the demand and supply will intersect at an equilibrium E1.
The new equilibrium would have a higher price P1, although the quantity demanded (Q2)
would be lower than the temporary increase at Q1 but higher than the original at Q.

13. Cross Demand

14. Demand for Substitute Goods
There are two types of goods: substitute goods and complementary goods. Two substitute
goods can be used instead of each other, and if the price of one of them increases, the
demand for that product will decrease, and people will be more likely to demand a
substitute product. For example, if beef and chicken are two substitutes, as the price of beef
increases, so makes the demand for chicken.

15. Demand for Complimentary Goods
A complementary good is a good that is used with another commodity, and if the price of
one of these commodities increases, in addition to the demand for that commodity, the
demand for the other commodity also decreases. Examples of complementary goods
include hot dogs and hot dog buns, smartphones and protective cases, printer and ink
cartridges, cereal and milk, and laptops and laptop cases.

16. Comparative Demand for Healthcare and Other Goods

17. Demand for healthcare
Demand requires people to seek a service they can afford and are willing to pay for it. The
need for healthcare is the care that doctors believe is essential for a person to stay healthy.
Sometimes, patients think they need healthcare, but doctors believe they cannot benefit
from such care. Sometimes the doctor believes that there is a medical need, but the patient
does not consult his doctor because he prefers not to receive treatment or that he has not
recognized the need.

19. Health can be considered as both a consumer good and a capital good. From the people’s
point of view, health is a consumer product because it makes them feel better. As a capital
good, it is also suitable for people’s health because it increases the number of healthy days
of life to work and earn money.

21. Fundamental Concepts of Grossman Model
'Grossman model' relies on two fundamental concepts:
1. Health--not health care--enters into the utility function; healthcare services are chosen by
individuals but these are only inputs, where a production function translates health care
goods and services into the actual health people care about, and
2. Health is a stock, similar to a capital stock which may depreciates over time or may
improve over time by investment on it.

22. Predictions in Grossman Model of Health Demand
First, people will invest more in medical goods and services as they age. He assumes that
health stock may depreciate faster as people age and in response people will invest more in
health activities and medicine as they age.
Second, the model predicts high-wage individuals will invest more in health through spending
on medical goods and services compared to their own time investments, since the cost of
time is higher.
Third, Education may have a negative effect on demand for healthcare, because more highly
educated people are presumed to be more efficient in producing health. An increased
awareness in value of good nutrition, and prevention of diseases will reduce the quantity of
healthcare required.

23. Peculiarities of healthcare Demand
1. Derived Demand:
In economics, the term derived demand is used to explain the demand for some products
and services that are not directly wanted or demanded by the people, but the demand for
these products is derived due to the demand for other products.

24. 2. Asymmetrical Information and Suppliers’ Induced Demand (SID):
Asymmetric information refers to any situation where one party to a transaction has greater
material knowledge than the other party. Patients’ perceptions of their need and capacity to
benefit from healthcare are strongly influenced by physicians and healthcare providers.
Although in economics, it is assumed that consumers can make informed decisions about
their consumption patterns, healthcare consumers delegate this decision-making power to
healthcare workers who are more aware of them. This phenomenon is due to information
asymmetry between healthcare providers and patients, which carries the risk of ‘Suppliers’
Induced Demand’ (SID) by providers to increase revenue.

27. In a principal-agent relationship, one entity authorizes another to perform actions on their
behalf. An agent's duties include acting in the principal's best interests and adhering to legal
regulations.
Principal-Agent relationship

28. 3. Uncertainty:
Another complication stems from the fact that healthcare is highly heterogeneous. Each
patient has a relatively different combination of pain and symptoms. Therefore each patient
needs to purchase a fairly different package of care that both the patient and the physician
have uncertainty about its effectiveness in meeting the need.

29. 4. Moral Hazards:
Moral hazard is the phenomenon that having insurance may change one's behavior. If one is
insured, then one might become reckless. “Moral hazard” refers to the risks that someone or
something becomes more inclined to take because they have reason to believe that an
insurer will cover the costs of any damages.

30. Figure: At price P, a health commodity of Mu quantity will be bought. With insurance, price
comes down to ‘0’, as Insurance company pays the money, when quantity demanded will be
Mi. With zero price, consumer purchase Mi-Mu additional units of medical care. The Moral
Hazard due to over consumption is area AMuMi..

31. 5. Adverse selection
Adverse selection is the phenomenon that bad risks are more likely than good risks to buy
insurance. For either possibility, the danger is that the bad risks will buy insurance and the
good risks will not.