A Simple Model of Demand
Farid Abolhassani
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)
Demand: The amount of money purchasers are prepared to
pay for a commodity
To demand something, you must:
 Want it
 Be able to afford it
 Have a definite plan to buy it
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
Quantity Demanded:
Demand Curve
The exact quantity
demanded at a particular
price, or a particular
point on a demand curve.
The law of demand:
Other things remaining
the same, the higher the
price of a good, the
smaller is the quantity
demanded
Demand Schedule
per tape)
(Pounds
Benefit
Marginal
per tape)
Benefit (Pounds
Marginal
Marginal Benefit
A Change in Demand
 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
The principle of
diminishing
marginal
utility
Utility-maximizing Combinations
Efficiency, Price and Value
Prices
Cola
6
3
Commodity
Quantity
Total Co. Ut.
MU
MU/P
Cost
Total Cost
Total Utility
Cola
1
2
3
4
1
5
2
6
7
8
3
9
75
117
153
181
50
206
88
225
243
260
121
276
75
42
36
28
50
25
38
19
18
17
33
16
25.00
14.00
12.00
9.33
8.33
8.33
6.33
6.33
6.00
5.67
5.50
5.33
3
6
9
12
6
15
12
18
21
24
18
27
3
6
9
12
18
21
27
30
33
36
42
45
75
117
270
334
231
256
294
313
468
503
381
397
Film
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)