Law of Demand

Definition

Health Economics

  • This states that demand (in the sense of quantity demanded per time period) rises as price falls. While for some economists the 'law', which states that demand curves always slope downwards from left to right is an article of faith, its interpretation really depends on what is held constant along the demand curve. There are conceivable empirical exceptions if income in the sense of money income is held constant and the good in question is an inferior good. No empirical exception is permitted if income in the sense of utility is held constant for, in this case, the 'law' is merely another way of putting the standard axiom of convexity (or diminishing marginal rate of substitution in consumption). These ceteris paribus notions are precisely that, of course - notions. In empirical work they are included amongst the determining variables but they still need careful definition (the concept of 'real' income to be used particularly needs definition). Because the role of price in (Western) health care is much attenuated by insurance arrangements most empirical demand analysis has concerned the demand for health (cf. health care) (e.g. Kenkel, 1991), the demand for health care insurance (e.g. Manning et al 1987), the non-price determinants of demand (e.g. Dranove, 1988) and the (apparent) demand for bad health (e.g. Liu et al., 1999).
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