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Health Economics
Lecture 7The Demand for Medical
Care
SPECIALThis week only
Gall Blatter surgery50% percent off
Derived Demand
Getting health by buying medical care
NormalMarket
MedicalMarket
Planned Yes No
Know Price Yes No
Guarantee Yes No
Equal Information Yes No
Health
Medical Costs
LargeGain
Diminishing Marginal UtilityHealth and Medical Costs
SmallGain
The Law of Demand
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
The Law of Demand
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Law of DemandWhen price falls
quantity demand increases
When price increasesquantity demanded falls.
Demand for Medical Care out-of-pocket price
incometime costs
prices of substitutes and complimentstastes and preferences
physical and mental profilestate of healthquality of care
Out-of-Pocket PriceAfter insurance
CoinsuranceCopaymentsDeductible
IncomeHigher income tends to
demand more medical care
Time CostsTime to visit medical
provider and the opportunity costs
Prices of Substitutes and Compliments
OR
AND
Tastes and Preferences
Marital Status - lessEducation - ?
Lifestyle - risky
Physical and Mental Profile
Gender - women moreRace/Ethnicity
Age - older more
State of Health
Sicker - MoreUnhealthy - More
Quality of Care
Hard to measurenice office
perception is more important than reality
Market DemandIntensive Margin
Do you buy more or less when the price changes
Extensive MarginDo more or fewer people buy
when the price changes
ElasticityA measure of how muchone economic variable
respondsto changes in
another economic variable
Elasticity
Percentage Change in Quantity DemandedPercentage Change in
Price
Price Elasticity of Demand
%%
QD
P
Percentage Change in Quantity Demanded
Percentage Change in Price
Price Elasticity of Demand
1
ElasticInelastic
<1 >1
1. Calculate Elasticity2. Take Absolute Value3. Compare to benchmark of 1
What determinesPrice Elasticity of
Demand?
Close Substitutes
Passage of Time
Luxuries vs. Necessities
Definition of Market
Share of Budget
Close Substitutes
Elastic >1
Inelastic <1
Passage of Time
More TimeMore Elastic
Luxuries vs. Necessities
Elastic Inelastic
Share of the Budget
ElasticInelastic
Small Large
Price Elasticity of Demand
% QD
% P
$0
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
1 2 3 4 5 6 7 8 9 10
Gallons - Gasoline
Price
%QD %P
(4-5)÷5
(6-3)÷3
-20%+100%
.2
Close Substitutes
Passage of Time
Luxuries vs. Necessities
Definition of Market
Share of Budget
% QD
% I
Income Elasticity of Demand
Normal, Inferior, or Luxury?
Income Elasticity of Demand
0
NormalInferior<0 >1
1
Luxury0 to 1
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