Concept Architecture
Concept
Theoretically, Demand is the quantity of a good or service that consumers are willing and able to purchase at alternative prices during a specified period, holding other factors constant. It is a fundamental concept in microeconomic theory derived from utility maximisation and consumer choice. In health economics, demand describes the utilisation of healthcare goods and services as a function of prices, income, health status, insurance coverage, and individual preferences.
Mathematically, demand is represented by a demand function that expresses quantity demanded as a function of price and other determinants. The demand function provides the basis for deriving the demand curve, estimating elasticities, and analysing consumer responses to changes in prices, income, and policy interventions.
In practice, demand is estimated using observational data, surveys, administrative claims, prescribing records, or healthcare utilisation databases. Econometric models are used to estimate demand functions, forecast healthcare utilisation, evaluate pricing and reimbursement policies, and assess the effects of insurance design, copayments, and other policy changes on service use.
Purpose
Used to quantify consumer willingness and ability to purchase healthcare goods and services, supporting utilisation forecasting, pricing analysis, reimbursement policy, and economic evaluation.
Mathematical Formulae
Primary Formula
Q? = f(P, Y, P?, P??, T, H, ?)
where:
- Q? = quantity demanded
- P = own price
- Y = income
- P? = price of substitute goods
- P?? = price of complementary goods
- T = consumer preferences
- H = health status
Supporting Formulae
Linear demand function:
Q? = a ? bP
where:
- a = intercept
- b = slope parameter
- P = price
Related Mathematical Methods
- Demand function estimation
- Utility maximisation
- Consumer choice modelling
- Elasticity estimation
- Econometric regression
- Demand forecasting
Example
Demand for a diagnostic test is modelled as:
Q? = 1,200 ? 40P
If the price is �15:
Q? = 1,200 ? 40(15) = 600
The model predicts demand for 600 diagnostic tests during the specified period.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
=Intercept-(Slope*Price) | =1200-(40*B2) | Estimates quantity demanded at a given price. |
| FORECAST.LINEAR | =FORECAST.LINEAR(B2,C2:C20,D2:D20) | Forecasts healthcare demand from historical observations. |
| LINEST | =LINEST(C2:C100,B2:B100,TRUE,TRUE) | Estimates demand function parameters from observed data. |
| TREND | =TREND(C2:C100,B2:B100,B101) | Projects future healthcare demand. |
VBA (Optional)
Automate estimation of healthcare demand functions, update forecasts from new utilisation data, and produce demand projections for policy analysis.
Sources
- Varian HR. Intermediate Microeconomics: A Modern Approach.
- Pindyck RS, Rubinfeld DL. Microeconomics.
- Grossman M. On the concept of health capital and the demand for health. Journal of Political Economy. 1972;80(2):223?255.
- Folland S, Goodman AC, Stano M. The Economics of Health and Health Care.
- Drummond MF, et al. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
Related Concepts (2)
Library
Publications
1
Uncertainty and the Welfare Economics of Medical Care — Kenneth J. Arrow, Vol. 53, No. 5 ed., 1963 (American Economic Review)
The founding paper of health economics as a discipline, analysing how uncertainty, asymmetric information, trust and the special features of medical markets prevent them from behaving like ordinary competitive markets — the intellectual origin of the entire field.
Journal ArticleView source →
Frequently Asked Questions (6)
What is demand?
The quantity of a good or service consumers are willing and able to purchase at a given price over a specified period.
Source: Varian 2014
What is demand in economics?
Demand in economics is the quantity of a good or service consumers are willing and able to purchase at a given price over a specified period. It combines desire with the ability to pay, so it refers to purchases people would actually make at each price, not merely what they want. Demand is defined over a period and at each possible price, giving the relationship between price and quantity that lies at the centre of market analysis.
Source: Varian 2014
What is the difference between demand and quantity demanded?
Demand refers to the whole relationship between price and the quantity buyers will purchase, the entire schedule or curve across all prices, whereas quantity demanded is the specific amount buyers will purchase at one particular price. A change in the good's own price moves along the demand relationship, changing the quantity demanded, while a change in another factor, such as income or tastes, shifts the whole relationship, changing demand itself. Keeping the distinction clear avoids confusing movements along the curve with shifts of it.
Source: Varian 2014
What factors determine demand?
Demand is determined by the good's own price and by other factors that shift the whole relationship: consumers' income, the prices of related goods such as substitutes and complements, tastes and preferences, expectations about future prices, and the number of buyers. The own price sets the quantity demanded along a given demand curve, while changes in the other factors move the curve, raising or lowering the quantity demanded at every price. Together these determine how much of a good buyers will purchase.
Source: Varian 2014
What is the law of demand?
The law of demand states that, other things equal, the quantity of a good demanded falls as its price rises and rises as its price falls, giving demand its usual downward slope against price. This arises because a higher price leads buyers to substitute toward other goods and reduces their real purchasing power, both lowering the quantity bought. The law describes the normal inverse relationship between a good's own price and the quantity demanded, holding other influences constant.
Source: Varian 2014
How does demand apply to health care?
Demand applies to health care as the quantity of care people would use at each price, but with important qualifications. Insurance lowers the price patients face at the point of use, raising the quantity demanded, and patients often lack the information to judge what care they need, relying on providers. Illness itself, not price alone, drives much use. These features mean health care demand departs from the simple model, which is why it receives special treatment in health economics.
Source: Varian 2014
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 10 Sep 2025
Content version: 1.0.0
Canonical Identity
- Persistent URI
- https://healtheconomics.wiki/concept/demand
- Term code
- HE-EE-ME-014
Stable URI · Machine-readable · Resolvable · CC BY 4.0