This occasional series has taken intrepid readers through economic concepts such as Utility, Decreasing Marginal Benefit and Willingness to Pay — all assumptions underlying the downward-sloping Price/Quantity Demanded curve that we call a Demand Curve.  As those posts illustrated with Jack and Jill’s different Utilities,  analyzing the logic of consumer choices given their limited resources is one way to understand the law of demand and start estimating the demand Curve.  We left off with Jack and Jill’s combined individual Demand Curves for hearing aids versus golf membership (Fig 1) and reminded ourselves that real Demand Curves consider hearing aid purchases weighed against all other consumer choices.   Today’s post considers factors that affect and change Demand Curves.  As noted in the previous post in this series, even if we do not know exactly WHAT our demand curves look like, we can and should think hard about factors that affect consumers’ purchasing power and consumption choices.

Figure 1. Jack & Jill's Combined Individual Demand Curve

Figure 2. Projected Demand Curves for CICs, from Kochkin

   

Having derived the Demand Schedule/Curve (Fig 1, right) we arrived at the economist’s conclusion that:  
 
Holding prices of all other goods constant, as the Price of hearing aids goes up, Quantity Demanded goes down.  
 
But check out Figure 2 — there are two Demand Curves for hearing aids there.  You could say that something made the Demand Curve shift up for one group of consumers.  What’s that about and how can we make that happen?  Moving up and down the Demand Curve (Fig 1) is NOT the same as moving the whole Curve (Fig 2).  
 
One of the hardest concepts to get across in a principles of economics class are changes in demand versus changes in quantity demanded. This short scene from The Hudsucker Proxy solves that problem in a humorous way.
 
 Table 1 describes reasons that Demand Curves shifts and suggests ways we might be able to shift demand for hearing aids.
 
Shifts in Demand[1]
Table 1.  Reasons for Demand Curve Shifts.
Consumer Preference Tastes change Quantity Demanded.  Tiny, “invisible” hearing aids command higher Demand. Digital, “fully automatic” hearing aids are preferred and increase Demand — the Curve shifts up[2]
Consumer Information

Perceived credible sources (FDA, insurance companies) influence Demand in positive or negative ways by releasing information that supports or detracts from hearing aid characteristics (e.g., Price, Performance, Safety). Hearing Aid Manufacturer’s corporate brands (e.g., providing hearing aids to the needy of the world versus  insider trading scandals) can also influence consumer information and shift Demand up or down for product.   

Another consideration is whether consumers desire information.  As my esteemed colleague David Kirkwood succinctly puts it:“the fact is, most people are so reluctant to get the hearing help they need, they will use any excuse not to take the next step toward getting help—including the minimal cost of doing’“research.’”

Consumer Income

Demand for so-called “normal goods” shifts downward (is reduced)  when people’s incomes decline, as in a recession.  Hearing aids dispensed by Audiologists are normal goods — when the economy is good, the Demand Curve shifts up, when the economy is down, the curve shifts down.

But, there is another class of goods that economists call “inferior goods” and that is what our industry is encountering in recent times.  Demand for inferior goods goes up when people’s incomes decline (see substitutes, last row of this table).

Number of Consumers

The Demand Curve shows the relationship between Price and Quantity demanded by all consumers in the market.  Those last three words are tricky — we talk about “the market for hearing aids” as though it includes everyone with hearing loss, but we also acknowledge that upwards of 80% of those with hearing loss are not consumers of hearing aids. They are not in the market.  That’s why Dr Kochkin shows two Demand Curves for a single “market” of people with hearing loss.  Just because there is a single market of people with hearing loss does not mean that they are all in the market for hearing aids.  In the CIC case, Dr. Kochkin is showing that there is a market for CIC wearers, there is a potential market for those who have hearing loss who are considering CIC purchase.  Not shown is another market of those with hearing loss who are not even considering hearing aid purchase.

The big idea is to increase the number of consumers who are really in the market.  The bigger the number the bigger the demand and the demand curve shifts up.  The burgeoning Senior and Boomer populations are a help, as many have pointed out, hopefully.

Consumer Expectations of Future Prices Consumers defer purchases if they think Price is going to go down; they purchase immediately if they have reason to expect Price to go up.  The hearing aid “market” is replete at present with advertising and marketing campaigns promoting low Price.  To the extent that decreasing Price looks like a continuing trend to consumers, they have good reason to wait to purchase, meaning the market is temporarily contracted and the Demand Curve shifts downward.
Prices of Similar Goods

Substitutes are goods in economics that provide many of the same benefits to consumers as another good. If the Price of a substitute falls, it usually means that the Price of the other good will fall as well.  The typical example is margarine and butter.  Until recently, the hearing aid market had few if any substitutes, so it was butter or nothing.  Emergence of PSAPs, mail-order hearing aids, and other options has given consumers any number of substitutes for hearing aids dispensed in the traditional manner.  Not surprisingly, we are seeing a lot of price adjustments and price anguish among traditional dispensers as low-cost substitutes continue to emerge.  This means the Demand Curve for traditionally fit hearing aids is shifting downward as the market is shrinking.

Complements are goods in economics that are consumed with another good — batteries and hearing aids are complements.  If the Price of complements rises, demand for the other good decreases, and vice versa.  In our market, we are fortunate that hearing aid batteries are inexpensive and readily available.  If they were not, fewer people would be interested in purchasing hearing aids, the market would shrink, and the Demand Curve would shift downward.

 
 photo courtesy of tvtropes
 
References    (↵ returns to text)

  1. Taken from pages 56 & 57 of Taylor & Weerapana, Principles of Microeconomics (6th Ed, 2010).  South-Western Cengage Learning. Mason, Ohio.
  2. “up” and “down” are awkward ways of describing the Demand Curve shift.  Some economists describe decrease in the schedule as a “leftward” shift (same as “down”); and increase in the schedule as a “rightward” shift (same as “up”).  Up = rightward = increased Demand.  Down = leftward = decreased Demand.

One Response to Econ 101: If Hearing Aids Were Hula Hoops

  1. Jerry says:

    Eureka, Holly !
    I think that you may have “done broke da code.”

    Now, if you could figure out a way to “teach” folks just how to
    dependably measure the real merits of expensively priced devices
    versus bargain priced electronic hearing aids.

    Many confusion factors are involved in the “willing, would-be consumer’s”
    attempts to divine what is an acceptable expense, what is an unacceptable expense, and what is a ridiculously prohibitive expense. Myriad choices, lots of
    statistics, plenty of colorful marketing language, various warranties, complex charts, and testimony from mystery consumers assail the legitimate candidate within the “demand” flock. That potential buyer may very well choose
    a high cost product if he/she can be assured of acquiring-superior remedial equipment.

    Somehow, it seems that one of the key confusion factors involved is that the consumer has a bewildering number of choices to make. Most all of the choices promise “improvement” in ability to hear. What is daunting for many is the
    unknown answer to these questions:

    ” How much does it cost to improve hearing from, let’s say a mid-level (30-40%)loss to only a modest (10-20%) loss? How can one be assured that a great improvement can be achieved in virtually all environments? How does one find
    reliable satisfaction without “test-driving” some devices that cost several thousands
    of dollars? If a would-be, seriously hearing-challenged buyer could not hear a hard metal rock band if it was playing in his master bathroom at night, can it be said that his hearing is improved if he buys devices that allow him to hear his soft-spoken mother-in-law in the middle of NYC’s Grand Central Station? Isn’t it logical to think that a test-drive would allow him to know how much improvement he should buy, and at what cost?”

    Maybe all of these questions have already been answered, but I still think there is a huge percentage of the “willing market” that see the hearing aid scene as being elusively cloaked in a rather dense “fog” of conflicting information. The same “fog” of conflicting information may exist in the auto market, but at least in that market the “willing consumer” gets to test drive the item that seems appealing.

    Just rambling, as a function of having read the interesting demand curve item….
    Jerry