1. Unit-Three
Health care production and Health care markets
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2. Roadmap for the course
• Demand and Supply
• Elasticity of demand and supply
• Supply and demand equilibrium
• Market failure and dealing with market failure
• Perfect competitions
• Medical care market
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3. Ceteris paribus
• Latin expression for "other things being equal."
• Used in economic analysis to focus on explaining
the effect of changes in one (independent)
variable on changes in another (dependent)
variable without having to worry about the
possible offsetting effects of still other
independent variables.
• Example: “An increase in the price of beef will
result, ceteris paribus, in less beef being
purchased by consumers." 3

4. ceteris paribus---
• if an increase in tuition led to a decrease in
college enrollment taking into account all
other factors such as changes in student
incomes or in the market value of a college
degree
An increase in tuition reduces college
enrollment, ceteris paribus
4

5. A. Demand
• The schedule of amounts of any product that
buyers will purchase at different prices during
some stated time period
• Need or want + ability and willingness to pay
for a commodity
• Demand is the amount of a good that
consumers are willing and able to buy at a
given price
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6. Demand in Health Care
• Every individual has a need or a potential
need for health care in the form of health
promotion, prevention, cure or rehabilitation.
• All the needs and wants of society can not be
met at the same time even in richer countries
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7. The Law of Demand
Decrease in a good’s own price will result
in an increase in the amount demanded,
holding constant all the other
determinants of demand.
• As the price of a good goes up, buyers
demand less of that good.
7

8. The 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
Demand curves are negatively sloped.
• The buyers' demand is represented by a
demand schedule, which lists the quantities of
a good that buyers are willing to purchase at
different prices
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9. 9

10. The Demand Curve
• The dependent variable is the quantity
demanded.
• The independent variable is the good’s own
price.
Holding constant all other determinants of
demand
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11. Example
• You are the CEO of a hospital and a local shop owner
comes to you looking to sell your hospital supplies to
disinfectant
• She/he offers you several prices and you tell her/his
how much you are willing to buy at each price point.
• What is your hospital’s demand curve?
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Price Charged Quantity Sold
$5.00 18
$10.00 12
$15.00 8
$20.00 2

12. Moving along the curve
• When price and quantity are the only two
variables,
• QDd is move along the demand curve.
• The line itself does not move.
• A change in the quantity demanded is a
movement along the demand curve due to a
change in the price of the good being demanded
12

13. Moving along the curve---
Example
• If the current market price charged for drug is
$4 so that the current quantity demanded of
drug X is 3 units . If the price of drug X
increases to $6, the quantity demanded of
drug X moves along the demand curve to the
left, resulting in new quantity demanded of 2
unit s of good X.
13

14. Moving along the curve---
6 A
4 B
2
1 2 3 4 5
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15. Moving the curve
• A change in demand is represented by a shift
of the demand curve. As a result of this shift,
the quantity demanded at all prices will have
changed.
15

16. Moving the curve----
Determinants of demand curves to shift as a result of
economic variables other than price:
1. Income
2. Tastes/ Preference patterns
3. Prices of substitute goods (direct price
relationship)
4. Prices of complementary goods (inverse
relationship)
16

17. Determinants of demand curves--
5. Expected price of the product in future periods
6. Number of consumers in the market
Example
17
Original demand New demand
Price Quantity demanded Price Quantity demanded
3 20 8 20
5 15 12 15
10 10 18 10
18 5 22 5

18. 18
Shifts Because of Increased Demand
18
Price
20
15
10
5
New Demand Curve
Original Demand Curve
0
5 10 15 20 25
Quantity

19. Shifts Because Decreased Demand….
19
Price
20
15
10
5
Original Demand Curve
New Demand Curve
0
5 10 15 20 25
Quantity

20. Demand Curve Shifters
1. Income (government tax )
2. Substitutes prices
Two goods are substitutes if an increase in the price
of one of them causes an increase in the demand for
the other
– Coke and Pepsi: If price of Coke increases, demand
for Pepsi will increase (direct relationship)
3. Tastes
– If I sell jeans, and they go out of fashion, what
happens to demand?
4. Insurance (more to come!)
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21. Demand Curve Shifters---
5. Prices of complements
Two goods are complements if an increase in the
price of one of them causes a decrease in the
demand for the other.
– Cars and tires: If price of a car goes up, demand
for cars will decrease. Less people will buy cars, so
less people will need tires. Therefore, demand for
tires will decrease
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22. Demand Curve Shifters---
6. Demand of other goods
•Normal good: When an increase in income
causes an increase in demand
•Inferior good: When an increase in income
causes a decrease in demand
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23. Reasons Why shift For Health Care
• Price of health care may not be affordable
• May not have access the health facility
• The service required may not be available
• Religious and cultural believes and practices
may hinder the use
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24. Elasticity Of Demand
• Elasticity provides a way of measuring how
sensitive demand is to factors such as a
change in price.
• Take the relationship between price and
quantity demanded
• The relationship between demand and its
determinants.
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25. Measuring demand elasticity
1. Price-elasticity of demand
2. Income-elasticity of demand
3. Cross-elasticity of demand
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26. 1. Price elasticity of demand(PED)
• The responsiveness or sensitiveness of
demand for a commodity to changes in its
price.
• The percentage change in demand for a
commodity due to percent change in one of
the independent variables.
• PED=% change in quantity demanded
% change in price of the good
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27. Price elasticity…..
• Example 1: If a 20% increase in the price of a
product a 10% fall in the quantity demanded ,
the price elasticity of demand will be:
PED=10%/20%=0.5
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28. Price elasticity……
Example2:When price increase from 48 to 58
what is PED?
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Price of INT(Birr) Quantity
Demanded
30 400
48 350
58 260
70 180

29. Price elasticity….
Solution
PED= Qd2- Qd1
P1- P2
PED=260-350 = 9(90%)
58-48
This means a 10%(58-48) increase in price leads
to a 90% decrease in quantity demanded.
29

30. Determinants of PED
1. Substituted products
• If a product can be easily substituted, its
demand is elastic.
• If a product cannot be substituted easily,
its demand is inelastic.
30

31. Determinants of PED---
2. Necessity products: Necessity's demand
is usually inelastic because there are usually
very few substitutes for necessities.
3. Luxury product, There are usually many
substitutes for these products. So their
demand is more elastic
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32. 2. Income elasticity
• The percentage change in quantity demanded
with respect to the percentage change in
income of the consumer.
• It measures how demand reacts to change in
income
IED=% change quantity demand
%change income
32

33. Income elasticity…
Example: If a 2% rise in the consumers income
causes a 8% rise in the products demand,
then the IED for the product will be:
IED=8%/2%=4
33

34. 3. Cross price elasticity of demand
Measures how demand reacts to changes in the
price of other goods.
XeD=%change in quantity DD of main good
%change in price of other good
Example: If DD for butter rose by 2% when the
price of margarine rose by 8%,then the XED of
butter with respect to the price of margarine will
be: XeP=2%/8%=0.25
34

35. Cross elasticity…
• If cross price elasticity of demand is positive
then this indicates that the goods are
substitutes.
• If it is negative, then the goods are
complements.
Example2: If a 4% rise price of bread to 3% fall in
demand of butter XeD=-3%/4%=-0.75
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36. Elasticity
• Elasticity cut-off points:
– Єd is between 0 and -1.00 demand is inelastic
– Єd is between -1.00 and infinite demand is elastic
– Єd is -1.00 or 1.00 demand is unit elastic
– Єd is infinite demand is perfectly elastic
– Єd is 0 demand is perfectly inelastic
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37. Interpretation
Elastic of demand Inelastic of demand
• Luxuries • Necessities
• Large expenditures • Small expenditures
• Durable goods • Perishable goods
• Substitute goods • Complementary goods
• Multiple users • Limited users
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38. B. Supply
The amounts of a good producer are willing and
able to sell at a given price.
38

39. Market supply curve
• The total quantity all
producers are willing
and able to produce at
different prices,
holding all other
variables constant.
• If holding all other
economic variables
constant, the supply
curve will always be
upward-sloping
(positive)
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Price Supply
Quantity

40. Shifts in the Supply Curve
• Variables(determinants) of shift the supply curve:
1. Input prices (costs of production)
2. Technology/Government regulation
3. Number of firms in the market
4. Substitutes goods
5. Expectations of future prices
40

41. Shifts in the Supply Curve
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New Supply Curve
Price
Original Supply Curve
Quantity

42. Shifts because of decreased supply
Drought = less fruit from the harvest = less
fruit to sell in the market place
–Supply curve shifts inward (to the left)
• Therefore, we can sell our fruit at a higher
price in order to profit because there is a
shortage in the overall market
42

43. Supply Shifters
1. Number of suppliers entrants in the market
More entrants = more supply at a given
price, supply curve shifts to the right
2. Technological advances
As technology improves, it becomes
cheaper to produce a given item, so the
supply curve will shift to the right.
3. Input prices
An increase (decrease) in a key input price
will shift the supply curve to the left (right)
43

44. Supply shifters…..
4. Government regulation
• If it makes costlier to produce, supply
curve shifts to left
• If it makes cheaper, supply curve shifts
to right.
5. Weather/Natural Disaster
• If a storm wipes out a crop,shifts to left.
• If much needed rain aids crop, shift
right.
44

45. Law of Supply
The quantity offered by sellers of a good
or service is directly related to price, all
things Being equal
Producers are more willing to sell greater
amounts of a good at higher price ,
because this good has become relatively
more profitable to produce, compared to
other goods
45

46. Changes in Quantity Supplied and
Supply
Change in the quantity supplied
Movement along the same supply curve
that occurs because the price of the
product has changed
Change in supply
A shift of the entire supply curve
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47. Price elasticity of supply
• It is measures how sensitive quantity supplied
is to a change in the price of the good.
• PES=% change in quantity supplied
% change in price of the good
47

48. Demand and supply equilibrium
• The market price of a good or
service is the intersection of
the supply curve for the
producer and the demand
curve from the market.
• This is known as the
equilibrium price
• Balances the willingness of
the supplier to produce the
good with the willingness of
the consumer to purchase the
good.
48

49. Price Supply
Po
Demand
Qo Quantity
49

50. Market Equilibrium . . .
• Excess demand exists when at the current
price, the quantity demanded is greater than
the quantity supplied.
• Excess supply exists ,when at the current price
the quantity supplied is greater than quantity
demanded
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51. MARKET AND MARKET STRUCTURE
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52. MARKET AND MARKET STRUCTURE
WHAT IS MARKET?
• Market is an institution, mechanism or
situation that brings together buyers and
sellers of particular goods, services or
resources.
• A market is not a place rather it is a group of
buyers and sellers with the potential to trade
with each other
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53. Market-------
Three important concepts:
a. Human needs are:
– basic (natural) requirements for survival.
– classified into normative needs and felt needs.
– health and education are extended forms of
needs.
– unlimited
• *Marketers don’t have role in creating needs
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54. Market-----
b. Human wants
– the desires or wishes that people have to obtain
and use various goods and services that provide
them utility.
– forms of needs shaped by culture and individual
personality.
– unlimited
Some wants have biological roots. And others are
rooted in the conventions and customs of society.
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55. Market---
• Human wants can be classified into:
1. Necessities :
a. Necessities of existence
b. Necessities of efficiency, and
c. Necessities of convention.
2. Comforts- are related to time and place;
have interchangeable positions
3. Luxuries
• *Marketers play great role to make wants part of
life
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56. Market----
c. Human demand
• Demand is want backed by the purchasing power of
persons
• For demand to take place, a person must :
want to buy the product.
have the money or the ability to buy the
product.
be willing to spend money on the product.
• We say effective demand is created when a
consumer have the willingness and the ability to
buy a product (service) on a given price.
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57. THE HEALTH CARE MARKET
• Like any other market, a market for health care
involves the buyers and the sellers.
• However, there is no conventional market in
areas of public sector activity (such as health
care).
• The five health markets typically analyzed are:
Health care financing market
Physician and nurses services market
Institutional services market
Input factors market
Professional education market 57

58. WHY HEALTH CARE MARKET IS NOT
PERFECT?
• The market for health-care services is considered an
imperfect market because:
1. health care is a heterogeneous product.
2. patients who are insured have third-party
payers covering their direct medical expenses
3. a “market price” is lacking, i.e., no feedback
mechanism exists that reflect the value of the
resources used in health care.
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59. Market Failure
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60. Market Failure
Market failure occurs when freely functioning
markets, operating without government
intervention, fail to deliver an efficient or
optimal allocation of resources.
The failure of an unregulated market to
achieve an efficient allocation of resources
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61. Economic Justifications For Market Failure
1. Nature of goods (public goods)
2. Externalities (Positive and negative)
3. Natural monopolies
4. Imperfect competition
5. uncertainty and imperfect information
6. Asymmetry of information(Unequal)
7. Health care as free market
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62. 1. Public Good(Nature of goods)
A good that is non rival and nonexclusive
• Non rival: one individual’s consumption of the
good doesn’t affect any other individual’s
consumption of the same unit of the good. Eg. TV
• Non exclusive: it is not possible to exclude any
one from consuming the good.
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63. 2. Externalities
• Costs or benefits created from an economic
activity that affect a third party (those not
directly involved); can have positive and
negative effects
63

64. Externalities-----
Positive Externality: One person’s consumption
of good increases the other people’s utility with
out them having to pay for it
Negative Externality: One person’s consumption
of good decreases the other people’s utility with
out them receiving any compensation
Eg. pollution, global warming, second-hand
smoke
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65. 3. Natural monopoly
It is a situation where one firm can meet market
demand at a lower average cost than two or
more firms could meet that demand
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66. 4. Imperfect competition
• Inaccurate information
• Misleading information
• Incomplete
• Uncertain
…information that influences consumers’ decision-
making in the market.
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67. 5. Uncertainty and imperfect
information
• Health care is expensive and we cannot
predict when we are going to be ill.
• What makes this worse is that postponing
buying health care is often risky
• So, we face the problems of risk and
uncertainty
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68. Uncertainty---
• The market response to this problem is to
develop an insurance market to remove the
uncertainty and risk from health care
spending
• Unfortunately, the health care insurance
market itself is often not efficient
due to 1. Moral hazard
2. Adverse selection
68

69. Uncertainty---
• Moral hazard-not bother to follow a healthy
lifestyle or to get preventative checkups
-It leads to an inefficiently large quantity of
resources being allocated to health care.
• Adverse selection-A company selling health
care insurance has to estimate the level of risk
accurately
69

70. 6. Asymmetry of information
(Unequal information)
1. Rational choices-When you go into a drug
vender to buy a CAF eye drop, you have enough
information to make a rational choice and you
do not need the shop assistant to tell you what
you should buy
70

71. Asymmetry of information--
2. Information problems-Most medical
information is technically complex and so not
easily understood by a layman
3. Doctors as agents-The asymmetry of
information makes the relationship between
patients and doctors rather different from the
usual relationship between buyers and sellers
71

72. Asymmetry of information--
4. Supplier Induced Demand-Demand that is
provided for the self interests of providers rather
than solely for patients interests.
Example: If doctors behaved like some financial
advisers or computer salespersons in the past
and maximized profits without any limit from a
professional code.
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73. Thank you!!!
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