Question

When would supplier induced demand increase? When will it decrease? Please provide examples! If doctors are presented a bonus for every patient they see that day would supplier induced demand increase or decrease?

Answer 1

Supplier induced demand is defined as an occurrence which is caused due to asymmetric information. Physicians or doctors know more than the patients which gives them room to manipulate the line of treatment.

Thus the demand is induced by the supplier of services in order to keep the customer or patient to demand additional services which are not essentially required for the patient.

Thus supplier induced demand would increase when the supplier acts as per their self-interest and thus creates additional demand, for example when doctors want to increase their income they will diagnose an expensive illness which requires great expenditure, when furniture suppliers sell furniture, but it requires several additional components which increases demand for other products.

Supplier induced demand would decrease when the patients are aware and when suppliers act according to the interest of their customers. For example, when doctors prescribe the set number of medicines in order to cure the patient completely. A seller sells high quality furniture which will last for ages.

If doctors are presented a bonus for every patient they see that day it would mean the supplier induced demand would increase because the doctor would tell the same patient to visit the clinic every other day, this would occur with all the patients, and thus the per day patient count would increase as there would be several repetitive customers which increases the patient count and doctors income. Thus doctors prescribe unnecessary regular visits.