The demand for blood transfusion by accident victims can be determined from the elasticity of the demand of blood with respect to price.
The theory is illustrated with a specific example, which we will use if you don’t know how to calculate it. One equation for this theory is as follows: D(QS) = Q*P – D where D(QS) stands for the change in quantity demanded, and Q*P stands for the change in price.
In other words, what would happen if there were an increase or decrease in demand? If the elasticity is greater than 1, then the quantity demanded should rise when prices rise while a negative elasticity means that quantity demanded should fall when prices are high.
1. The supply of blood is fixed.
2. The demand for blood is elastic, and therefore varies with price changes. This can be illustrated with an example where a 100 units of blood increase by 10% each year, leading to the elasticity value 0.903 (see the table below). Could this explain what happens in the market? If so, what determines the elasticity values?
3. If an accident victim absorbs a unit more than they did before they received the transfusion then their demand should drop by more than if they took 1 unit during this period and 2 units prior to that period when it was not available.
4. Because a greater change in demand leads to a higher elasticity, the elasticity will be highest when an accident victim’s demand is relatively insensitive to price changes and lower when prices have larger effects on their demand. This observation supports one possible explanation for the systematic differences observed in experimental estimates of the elasticity.
5. The influence of an increase in competition is still hard to understand: if more blood suppliers enter the market then this might have no effect or make the economy more elastic. On the other hand, if they exit, they may reduce competition and make it less elastic. As far I understand this phenomenon is related to the fixed supply of blood (1).
6. The theory that utilizes the indifference curve to explain this phenomenon explains the demand shift by a change in price.
7. The supply/demand theory is a good model to explain the elasticity of demand for blood transfusion because it also shows that when 1 unit is absorbed by an accident victim, and price rises, then their quantity demanded changes (at least under some conditions).
Thus, if we assume that the demand for blood is inelastic, and individuals do not significantly alter their quantity demanded when prices rises or falls over time, then the elasticity will be less than 1.
8. One reason why demand may be relatively inelastic is that there are loss functions which are discontinuous in their responses to changes in price.