Supply induced demand

Length: 1302 words

Supply induced demand occurs where an increase in supply directly lead to increase in demand. Most of the supply induces demand occurs in health care since most customers lack proper information to determine what services they require from physicians. Supply induced demand is the demand that exists beyond what a patient who is fully informed would have choosen. Therefore physicians use their superior knowledge to influence demand for self gain and interest (labell & rice, 1994).

By acting as agent of consumers, doctors are able to generate demand in response to change in fee or a decline in market share or where there is a change in labor-leisure choices. due to market failure occasioned by lack of proper information, financial incentive for providing extra services, self interest on part of physician and consumer ignorance the patient do not receive appropriate services. Through supplier induced demand physician have the ability to shift the consumers demand curve toward the right through convincing them to increase the use of medical care without decreasing the price charged for their services.

If consumers would have perfect knowledge in health matters then demand for medical care would be less (folland & stano, 1997). It creates a kind of monopoly power on the part of service providers who maximize their utility as opposed to maximizing the patient utility. Some of the argument is that supply induced demand occurs due to the moral hazard of the doctors on the supply side moral hazard arise due to third party problem where physician don’t bear the full cost of decision making and on the demand side due to asymmetric information between the patient and the physician.

S1 and D1 represent the initial supply and demand with equilibrium quantity being q1. If supply increases from S1 to S2 through the normal forces of demand and supply we expect prices to fall from P1 to P3 and quantity demanded should increase from Q1 to Q3 while elasticity of demand will determine whether total spending would either decrease or increase. In cases of elastic demand, total spending decreases due to decrease in doctor’s share of patient. Through the market forces assuming a competitive environment demand is considered independent and should be stable at D1 but due to the doctors influence it shift out to a new level such as D2.

The shift in demand will cause equilibrium price to shift to P2 and the equilibrium quantity being Q2. It is also possible for equilibrium to rise to new level P’2 with equilibrium quantity Q’2 in some cases as shown in the diagram. Where demand curve is elastic it means that a change in price will led to a change in quantity demanded. To illustrate the potential of supplier induced demand when demand curve is elastic then the following graph can be used. D1 is the initial demand curve while p1 is the initial price and equilibrium quantity is Q1.

When prices are increased from P1 to P2 would expect equilibrium quantity to drop from Q1 to Q2 under the standard demand analysis. Due to the doctors ability to shift demand then a new demand curve D2 will be obtained. According to the graph shown above the providers of health care have been able to maintain the original equilibrium quantity Q1 but at a higher price P2 therefore increasing their revenue. This is because the physicians are able to convince patient to increase the use of medical service without lowering the price charged. Case 2

In sub Sahara Africa most peoples are poor and have no access to healthcare furthermore they lack proper information therefore to spend any amount to combat HIV and AIDS this two factors have to be put to consideration. The use of high tech drugs in treatment of HIV / AIDS such as Retroviral have been effective in improving the immune system and helping many people to cope with the disease but since most pope are poor and have no access to health care unless those drug are subsidized by government then they will not play a major role in fight against Aids.

Furthermore the use of high Tech drug requires a specialist to undertake a clinical investigation on patient before recommending the proper medication thereby causing an added cost. Though high Tech treatment can be used for those infected with the disease it will not help reduce the spread of the disease therefore require the use of other practices. The use of low Tech behaviour practices is preferred since it is able to reach many people and combat the spread of the disease. The use of the media e. g. newspapers, magazine, T.

V and radio to educate people on issue such as abstain ace, faithfulness among the marriage partners and use of condom have been found to be effective. In term of resource allocation this type of method require less resources compared to high Tech drugs and also reach many people which serve it main purpose. Such fund should also be used in setting up V. C. T centers where people are able to check their status and incase they are found to be positive then they can start taking retroviral and where negative they can reinforce behavior to remain negative.

Poverty has also played a major role in the spread of disease in Sub Sahara Africa. Therefore some of the fund should be used in starting project which will be of benefit to the poor. Case study 3 Where FDA approves selling Claritin over the counter then most users will substitute other similar allergy drugs for Claritin thereby increasing its demand. Where demand increases while supply remain constant then prices will increase. Users with health cover will not change their spending on Claritin as the cost of the drug is borne by insurer and therefore any price changes will not affect their decision.

For users of other prescription allergy remedy they are likely to change to using Claritin as they will now not pay medical charges to doctors therefore lowering on their medical cost. Case study 4 Where the reimbursement rate of Medicare patient is reduced then more people will shift toward being private patient. The effect of such shifting to private patients can be indicated in the graph shown blow D1 and S1 represent the initial demand and price while Q1 represent the initial equilibrium quantity.

When the reimbursement rate is reduced then more people will shift therefore causing demand for private patient to shift outward to d2. The original number of private patient attending increase from Q1 to Q2 while price increases from P1 to P2. The effect of a decrease in reimbursement rate on medical patient can be illustrated below. The original cost of Medicare is p1 with quantity consumed being Q1. When the rate of reimbursement is reduced which translate to a higher price P2 then consumers will react by reducing the amount of service consumption from Q1 to Q2 ..

Due to this shifting some of the fixed costs apportioned to Medicare patient require to be shifted to private patient since their number will increase. Case study 5 Health insurance got through employment creates more demand unlike for individual policies where people are reluctant to pay. The cost of operating a health insurance through employment is less compared to individual s it require less resources in terms of manpower and operating expenses.

Employment therefore enables more people to have access to health insurance. Case study 6 Where cost sharing is increased this will hinder more people to access health care as more cost are borne by the individual , in attempt by hospitals to attract more patient then they may lower the price. In lowering the price then such hospitals in a bid to maximize profit may employ specialists who may not be properly qualified therefore offer poor quality service to patients.

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