a. Demand - analysing the buyers' behaviour

What will influence how much osteopathy people are prepared to buy at any particular time?

Substitution and income effects

Perhaps the most important factor will be the price of the treatment. The more expensive it is to buy osteopathy, all other factors remaining constant, the less we will buy. Why?

When osteopathy becomes more expensive two things happen:

1. relative prices change; and
2. our real income changes.

When we react to the price rise, we are taking both of these changes into account. The change in relative price means that osteopathy is now more expensive compared to other goods and services. How do we respond to this? Economists assume that people are satisfaction maximisers. This means that we all try to gain as much satisfaction as possible from our consumption of goods and services. So we react to the fact that osteopathy is now relatively more expensive by choosing to buy less of it and more of something else instead (substitution effect).

The increase in the price of osteopathy has also reduced our real income - we can now buy less than before with our money income. The way which we react to this change in real income depends on the kind of good or service. Osteopathy, like most goods, is a normal good - an increase in income leads to an increase in demand and vice versa. So a fall in real income will further reduce the amount of treatment bought (income effect).

The demand curve

This predictable relationship between price and quantity demanded allows us to define demand formally as the quantity of a good or service that buyers are willing and able to buy at every conceivable price. The demand curve (see Figure A) shows this relationship graphically.

Figure A

DD shows the quantity of osteopathy treatments that consumers are prepared to buy at every conceivable price. A change in price leads to a movement along the demand curve. When the price is P consumers will buy Q (Figure B). If the price falls to P' then the quantity demanded will rise to Q' (Figure C). A change in price has led to a movement along the demand curve.

Figure BFigure C

What else will influence how much osteopathy we buy? The answer is our income, our preferences and the prices of other goods.

Osteopathy is a normal good so if our income rises we will buy more treatment (see Figure D) at each price, and if it falls we will buy less (see Figure E).

Figure DFigure E

If our preferences change, we will buy more or less osteopathy at each price. If we decide we are keen on osteopathy (see Figure D), then we will buy more of it. If we go off the idea of osteopathy, then the amount we buy will drop (see Figure E).

Our demand for osteopathy will also be affected by the prices of related services. An obvious example is the price of physiotherapy, which is an alternative (or substitute) treatment for many of the conditions treated by osteopaths. If the price of physiotherapy falls (see Figure E) then some people are likely to switch from osteopathy to physiotherapy, so the demand for osteopathy would fall.

Our demand for goods and services is also affected by changes in prices of complementary goods. These are goods and services which tend to be bought together. For instance, if the price of eye tests rose significantly, then many people would not bother to get their eyes checked regularly. This would lead to a fall in the demand for spectacles.

Whenever income, preferences or the price of a related good or service changes, the demand curve shifts. You can try out the effects of changes in the graph above (see Figure A).