HEALTH ECONOMICS Demand The term demand signifies the ability or the willingness to buy a particular commodity at a given

point of time.

Innumerable factors and circumstances could affect a buyer's willingness or ability to buy a good. Some of the more common factors are: Good's own price:The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those prices.Generally the relationship is negative meaning that an increase in price will induce a decrease in the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. Price of related goods: The principal related goods are complements and substitutes. A complement is a good that is used with the primary good.Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline. (Perfect complements behave as a single good.) Income: In most cases, the more income you have the more likely you buy. Tastes or preferences:The greater the desire to own a good the more likely you are to buy the good. There is a basic distinction between desire and demand. Desire is a measure of the willingness to buy a good based on its intrinsic qualities. Demand is the willingness and ability to put one's desires into effect. It is assumed that tastes and preferences are relatively constant. Consumer expectations about future prices and income: If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now. If the consumer expects that her income will be higher in the future the consumer may buy the good now. In other words positive expectations about future income may encourage present consumption. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.

Demand curve This predictable relationship between price and quantity demanded allows us to define demand formally as the quantity of a good or service that buyers are willing and able to buy at every conceivable price. The demand curve (see Figure A) shows this relationship graphically.

Figure A DD shows the quantity of osteopathy treatments that consumers are prepared to buy at every conceivable price. A change in price leads to a movement along the demand curve. When the price is P consumers will buy Q (Figure B). If the price falls to P' then the quantity demanded will rise to Q' (Figure C). A change in price has led to a movement along the demand curve.

Figure B

Figure C

What else will influence how much osteopathy we buy? The answer is our income, our preferences and the prices of other goods. Osteopathy is a normal good so if our income rises we will buy more treatment (see Figure D) at each price, and if it falls we will buy less (see Figure E).

Figure D

Figure E

If our preferences change, we will buy more or less osteopathy at each price. If we decide we are keen on osteopathy (see Figure D), then we will buy more of it. If we go off the idea of osteopathy, then the amount we buy will drop (see Figure E). Our demand for osteopathy will also be affected by the prices of related services. An obvious example is the price of physiotherapy, which is an alternative (or substitute) treatment for many of the conditions treated by osteopaths. If the price of physiotherapy falls (see Figure E) then some people are likely to switch from osteopathy to physiotherapy, so the demand for osteopathy would fall.

Supply Supply is the amount of some product which will be available to customers or the willingness of the seller to sell. Factors affecting supply Innumerable factors and circumstances could affect a sellers willingness or ability to produce and sell a good. Some of the more common factors are: Goods own price: The basic supply relationship is between the price of a good and the quantity supplied. Althought there is no "Law of supply" generally the relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied. Price of related goods: For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good Technology. Technology is the way inputs are combined to produce a final good. A technological advance would cause the average cost of production to fall which would be reflected in an outward shift of the supply curve. Expectations: Sellers expectations concerning future market condition can directly affect supply. If the seller believes that the demand for his product will sharply increase in the foreseeable future the firm owner may immediately increase production in anticipation of future price increases. The supply curve

would shift out. Note that the outward shift of the supply curve may create the exact condition the seller anticipated, excess demand. Price of inputs: Inputs include land, labor, energy and raw materials. If the price of inputs increases the supply curve will shift in as sellers are less willing or able to sell goods at existing prices. For example, if the price of electricity increased a seller may reduce his supply because of the increased costs of production. The seller is likely to raise the price the seller charges for each unit of output. Government policies and regulations: Government intervention can have a significant effect on supply. Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations. Time and Supply Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. The Law of Supply Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Shifts in the Supply Curve While changes in price result in movement along the supply curve, changes in other relevant factors cause a shift in supply, that is, a shift of the supply curve to the left or right. Such a shift results in a change in quantity supplied for a given price level. If the change causes an increase in the quantity supplied at each price, the supply curve would shift to the right: Seeking to maximise profits leads sellers to want to sell more quantity at higher prices. There is a reliable and predictable positive relationship between price and quantity supplied. Formally, supply is defined as the quantity of a good or service that a population of sellers is willing and able to sell at every conceivable price. This positive relationship is shown graphically by the supply curve on the left - SS. If the price changes there is a movement along the supply curve (see Figure A).

Figure B

Figure C

Figure E

Figure F

Figure G

Figure H

F. Shifts vs. Movement For economics, the movements and shifts in relation to the supply and demand curves represent very different market phenomena: 1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.

2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

Equilibrium

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. Disequilibrium Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.

At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. Excess Supply is where Quantity supplied > Quantity demanded, and results in surpluses at the current price. 2. Excess Demand Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium. Excess Demand occurs when Quantity demanded > Quantity supplied, and results in shortages at current prices. In free markets, surpluses and/or shortages tend to be temporary and obey the law of supply and demand, since actions of buyers and sellers tend to match prices back toward their equilibrium levels. PRICE CEILING and PRICE FLOOR

Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance. Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price. When they are set above the market price, then there is a possibility that there will be an excess supply or a surplus.

Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price. When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers won't produce as much at the lower price, while consumers will demand more because the goods are cheaper SHORTAGE PRICE CEILING

SURPLUS -PRICE FLOORING