ABSTRACT
This chapter outlines the economic theory of demand, and considers its application in the fields of health and health care. The theory of demand is about trying to understand how people make choices and how their choices are likely to change with changing circumstances. A key issue is how much changes in these factors affect demand. Economists measure the effects using the concept of elasticity. Elasticity measures the responsiveness of demand to changes in prices, incomes or the prices of substitute or complement goods. Knowledge of price elasticity of demand can be useful for a range of policy decisions in health care and health promotion. An obvious example is the use of taxes to raise the price of cigarettes and discourage smoking. Studies of the elasticity of demand for tobacco have normally shown that demand is more elastic among young smokers, many of whom are recent starters.
