This chapter presents the following content: Theoretical derivation of the demand curve for medical services, economic and noneconomic variables that influence demand, elasticities, the impact of health insurance on demand.
Demand for Medical Services Part Health Economics Professor Vivian Ho Fall 2009 Outline Theoretical derivation of the demand curve for medical services Economic and noneconomic variables that influence demand Elasticities The impact of health insurance on demand Medical Care and Utility • Medical care is an input in producing health Subject to law of diminishing marginal productivity • Health yields utility to the consumer Subject to law of diminishing marginal utility Medical Care and Utility We can generally graph the relation between medical care and utility as follows: Utility Medical Care Medical Care and Utility The graph shows that as the level of medical care rises, each additional unit of medical care yields a smaller increase in utility Given this fact, how does the consumer decide how much health care to purchase? Consumer’s Optimal Choice of Health Define : MU = marginal utility of medical care P = price q = quantity of medical services tradeoffs z = quantity of all other goods Given the consumer’s income, she chooses q and z to maximize utility Utility maximization rule : MUq MUZ Pq Pz Consumer’s Optimal Choice of Health Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalized i.e The consumer equalizes “the bang for the buck” across all goods Proof Suppose that instead : MUq Pq > MUZ Pz Last $ spent on medical care generates more U than last $ spent on other goods Consumer could U by purchasing more medical care (q), and less other goods (z) Then MUq would fall, MUz would rise, until the ratios are equalized Deriving a Demand Curve for Physician Visits Note : Now let q represent physician visits Suppose Pq rises This will lead to : MUq Pq Consumer can Pq < MUz Pz U by purchasing less q, and more z lower demand for q Deriving a Demand Curve for Physician Visits Downward sloping demand curve for physician visits Price P1 P0 q1 q0 • Price changes lead to movements along D curve Elasticities (cont.) Own-Price Elasticity of Demand: E D % Q D % P % c h a n g e in q u a n tity d e m a n d e d % c h a n g e in p r ic e Example: If the elasticity of demand for physician visits is -.6, a 10% increase in price leads to a 6% decrease in the number of visits demanded Elasticities are scale-free We can compare the ED for physician visits vs nursing home days, even though they are consumed in different units Elasticities (cont.) ED is expected to be negative Thus, ownprice elasticities of demand are often quoted in terms of absolute value The demand curve is inelastic if 0