Running Head HEALTH 1HEALTH .docx

Running Head: HEALTH 1
HEALTH 2
Health Care
Your Name:
Student ID:
University
Due Date
#1 The demand or willingness to pay for medical care depends
on the marginal productivity of medical care on health and the
marginal utility associated with an additional unit of health.
Since marginal productivity declines with additional medical
care and marginal utility declines with respect to additional
units of health, the willingness to pay falls with greater units of
medical care.

3. a. Average real income in the community increases.
The demand curve would move to the right because the
community would be able to buy more of the normal goods,
health being one of them.
b. In an attempt to cut costs, the largest employer in the area
increases the coinsurance rate for employee health care
coverage from 10 percent to 20 percent.
The demand curve for inpatient hospital services rotates
downward pivoting off the point where the curve crosses the
horizontal axis. This is because the increase in the coinsurance
rate causes the out-of-pocket costs of inpatient hospital services
to increase.
c. The hospital relocates from the center of the city, where a
majority of the people live, to a suburb.
A move of the hospital out of the major metropolis would result
in an opposite shift in the curve from part a. The curve would
move to the left because the cost of the inpatient services would
go up with the additional travel costs (assuming the hospital did
not offset that cost). So community members would not have the
ability to buy as many services with the same dollar amount.
d. A number of physicians in the area join together and open up
a discount-price walk-in clinic; the price elasticity of demand
between physician services and inpatient hospital services is -
0.50.
The curve would shift to the left . This is because the same
units of price will now get you more services. The relationship
between physician services and inpatient hospital services for
this question’s scenario are inverse. As physician services are
utilized more, inpatient hospital services are utilized less, they
are substitutes in consumption.
4. The demand curve for medical services by the elderly rotates
upward pivoting off the point where the curve crosses the
horizontal axis. The more inelastic curve reflects the fact that
the elderly have more complete medical insurance coverage as
the out-of-pocket cost of medical care approaches zero.
7b) Physician services tend to be relatively price inelastic. If

this holds true, the physician in this example will have an
increase in revenues.
9a The own-price elasticity of demand is a function that
compares the quantity demanded change to the change of price.
b) Also, time allowed to research the options about a decision
and availability of alternative substitutes.
10)
a. Average travel time to the hospital diminishes by 5 percent
due to overall improvements in the public transportation system.
Hospital services would increase by 1.85%. 0.37*5=1.85
b. The price of nursing home care decreases by 10 percent.
Hospital services would decrease by 1%. 0.1*10=1
c. Average real income decreases by 10 percent.
Hospital services would decrease by 4.5%.
0.45*10=4.5
d. The hospital is forced to increase its price for services by 2
percent.
Hospital services would decrease by 0.5%.
2*0.25=0.5
Questions:
1. In your own words, use utility analysis and production theory
to explain why the demand curve for medical care is downward
sloping.
The demand for medical care is a very crucial aspect that is on
constant demand since it is a commodity as well as a service
that is needed in various levels of an individual's well-being.
However, medical care is not a cheap commodity. Thus, this is a
significant result of the downward sloping demand cure of
medical care. The demand for medical care increases
continuously as the price of the services and commodities
reduces, thus, the input has to be affordable to ensure that the

market is constant. Therefore, this can easily be understood
through the utility analysis which talks of the quantitative value
generated by an intervention. This goes to say that the demand
curve is sloping downwards because the intervention or
work/effort made is generally reduced in value to ensure that
patients can attain full medical services more affordable and at
their price range. I believe the medical care curve is downward
slopping also because of the qualifications and efficiency of the
medical practitioners. Since they are their knowledge and
understanding is the primary input, the financial price tag put
on the services they offer tends to rise immensely which leads
to a low turnout of patients.
2. After reading the chapter on demand theory, a classmate
turns to you and says, "I'm rather confused. According to
economic theory, people demand a good or service because it
yields utility. This does not apply to medical services. Just last
week I went to the dentist and had a root canal, and you can't
tell me I received any utility or satisfaction from that!" Explain
to your classmate how utility analysis can be used to explain
why he went to the dentist.
Well, it is possible to assume so considering you paid someone
to have your tooth removed. None the less there is an aspect to
your situation that may beg to differ to that notion, first and
foremost, you need to understand that utility analysis is the
estimated financial value that is generated from attaining a good
or a service of any kind. It might not appear to make sense at
the moment in light of the root canal you received, but, you
attained two things. First, you accomplished satisfaction
through the eradication of the constant and persistent pain you
could have been enduring if it were not for the root canal. You
also went to the dentist to attain financial indemnification since
it was the best move to make since you might have been at a
loose if you opted not to. This means that going to the dentist
reduced the chances of wasting money purchasing painkillers
and secondary solutions to the dilemma you were facing. You
should also realize that one main utility that you also attained is

comfort which now allows you to take part in other money
generating activities, least of which you might not have been
able to do if you failed to go to the dentist. Therefore, I firmly
believe you received both utility and satisfaction from the visit
to your dentist.
3. Use a graph to illustrate how the following changes would
affect the demand curve for inpatient services at a hospital in a
large city. a. Average real income in the community increases.
coverage from 10 percent to 20 percent. c. The hospital
relocates from the center of the city, where a majority of the
people live, to a suburb. d. A number of physicians in the area
join together and open up a discount-price walk-in clinic; the
price elasticity of demand between physician services and
inpatient hospital services is À0.50.
4. Many elderly people have purchased Medigap insurance
policies to cover a growing Medicare copayment. These policies
cover some or all of the medical costs not covered by Medicare.
Use economic theory to explain how these policies likely
influence the demand for health care by elderly people.
Many elderly persons are prone to a series of ailments, and this
can indeed prove to be a financial strain. Thus, this is one of the
main and leading factors of why they turn to obtain the Medigap
insurance policies which only covers up the loopholes left out
by the correlating Medicare policy. As it is well acknowledged,
medical care and services are not as cheap as it might seem.
Therefore, people require premium like insurance policies that
will enable them to acquire medical care in all genres while still
maintaining their financial welfare. As a result of these various
policies, the demand for health care by the elderly will strongly
be influenced since many more people will now be able to attain
medical services at the comfort of their financial suit. With
regards to economic theory, more financial growth is achieved

when a commodity is high on demand and being consumed as
well. Thus, economic theory does support the increased need for
medical care and the availability of policies that can make this
possible since it is more of a financial gain. Therefore, if a
demand statistical representation is developed for the elderly, it
will be clear to see that the demand has grown rampantly as
compared to the market seen in other age sets.
5. If you are covered by a private or a public insurance plan,
obtain a pamphlet outlining the benefits provided and the cost
of the program. Are there any copayments or deductibles? If so,
use economic theory to explain how they may influence your
demand for medical care.
The insurance policy does have a copayments policy that needs
to happen to be fixed and independent of any medical bill or
rates. It is evident that this plan will make it possible to attain
any form of medial cover needed at any season and any level
without the fear of financial constraints. Concerning economic
theory, this mode of copayment in the insurance policy being
offered will make it more than suitable to embrace and explore
more of the medical care services and goods. Thus, this
insurance cover does work for hand in hand in making sure that
medical care is consumed at a high rate and it is bringing in
financial gain. Not only this but as an individual, I will be able
to demand more medical care at any given moment since there
is assured coverage at all times. As a result of this, the demand
for medical care will improve and be the first want since it will
appear somewhat affordable and readily available thanks to the
insurance plan. It is also made possible to increase the demand
for medical care since the copayments are fixed which makes it
easier for any individual to plan themselves before any
payment.
6. In your own words, explain what a fuzzy demand curve is.
Why does it exist? What are its implications? 15 BUS508 –
Economics of Health and Medical Care Course Syllabus
Demand is the basic need and wants that is available when an
individual wants medical care. Many at times, these or such

choices of demand can and are easily influenced by what the
medical caregiver/physician advice the patient to do. Thus, this
causes uncertainty of the demand levels since it is not a direct
demand from the consumer. This leads to a fuzzy demand curve
as they rely on what they are told and at times this can quickly
put off the demand for a commodity, and it can immediately
impact the demand of the merchandise as well. This form of
demand curve exists due to the lack of certainty from the one
seeking medical care after receiving medical guidance which
may or may not work well with their financial plan. Thus, the
fuzzy demand curve is an approximation of the relative demand
and price that will be expected in a period. This demand curve
has the actual demand, and the estimated up and downshifts.
Thus, the fuzzy behavior is scheduled between the two demand
curves, the upward movement, and the downward movement.
Such a curve has a negative implication on medical care as it
can easily be manipulated by medical practitioners since many
patients do not know much about the medical care they receive,
or most of the medical terms that are labeled in the receipts and
pointed out by the physicians.
7. In reaction to higher input costs, a physician decides to
increase the average price of a visit by 5 percent. Will total
revenues increase or decrease as a result of this action? Use the
concept of price elasticity to substantiate your answer.
This sudden change will indeed have a positive impact on the
total revenue level as a whole. Therefore, as a result of the
action taken by the physician to increase the average price per
visit, the revenue that will be earned will rise and make it
possible for the physician or hospital to attain more returns
from the services and goods they offer. From the concept of
price elasticity, many or rather, most medical facilities prefer to
maintain the income elasticity of demand higher as this supports
the output the facilities will offer. This will mean that the
demand for better services and services, in general, will
increase as well as making it possible for medical practitioners
to take acute care and observation over their patients. Hence, an

increase in revenue will be evident since the services will
improve and the demand for the service from the physician will
increase as well thanks to the quantity and quality offered in
return.
8. You have just been put in charge of estimating the demand
for hospital services in a major U.S. city. What economic and
noneconomic variables would you include in your analysis?
Justify why each variable should be included in the study, and
explain how a change in each variable would likely affect the
overall demand for hospital services.
The demand for health care amenities and services is strongly
reliant on various economic and noneconomic factors that play a
significant role in rising or dropping the demand. Thus, I
believe that there are some significant economic and
noneconomic factors that must be pointed out in the analysis as
they will be the main pillars of the whole review. Below is a
break-down of some of the significant economic and
noneconomic elements that will be part of the study:
a) Hospital Funding
Many medical facilities rely on considerable funding support as
their major financial backbone, thus, seeing a reduction in this
will directly impact the service offered which will lead to either
expensive bills on patients to substitute the lack of funding.
This can easily trigger a slow in medical care demand.
b) Insurance policies
Many insurance policies make it possible for many people to
access medical care at ease. Therefore, in the analysis, the main
focus will be turned into determining what exactly causes these
services/policies to improve medical demand in return having a
positive impact on financial growth (Xueni&Hengpeng, 2018).
c) Technology
Technology is a noneconomic factor that has its weaves deep in
the medical care unit as it is a significant and leading factor on
and in offering medical care. Therefore, this element will make
it possible to understand the impact technology has on medical
care. Technology being an asset to a medical facility makes it

possible for an institution to be seen to have better therapeutic
output as compared to an institution that lacks technological
prowess.
d) Education
Education is a noneconomic factor that has substantial influence
over the demand of medical care. The level of knowledge or
experience on and in medical situations such as having a
medical background tends to make it easier for someone to
demand medical care as they know it might help them. On the
other side, the lack of medical information makes it easy for
many to overlook the importance of medical care.
9. Define own-price elasticity of demand, and explain how it is
related to the demand curve. Provide four reasons why the
demand for medical services is likely to be inelastic concerning
its price.
Own-price elasticity is the state in which an individual makes a
choice based on the value or the price of the medical care they
aim at receiving. Thus, this makes them group themselves in a
particular financial gap which is known as the own-price range
where they would way themselves. However, many at times this
aspect does not interfere with the demand for medical care as
various variables are In play when it comes to medical care.
Many at times, the demand for medical services is likely to be
inelastic concerning its price as many patients only end up
paying a small portion of the whole bill as other entities, be it
insurance policies or Medicare covers, end up catering for the
more significant part. At times this frame also fails to work
since the medical care needed might be urgent and will require
immediate attention as this is a policy in all medical facilities.
10. You are employed as an economic consultant to the regional
planning office of a large metropolitan area, and your task is to
estimate the demand for hospital services in the area. Your
estimates indicate that the own-price elasticity of demand
equals À0.25, the income elasticity of demand equals 0.45, the
cross-price elasticity of demand for hospital services concerning
the price of nursing home services equals À0.1, and the

flexibility of travel time equals −0.37. Use this information to
project the impact of the following changes on demand for
hospital services.
This would make it more efficient for the hospital as it will
have more ability to combat emergencies as well as deploying
ambulance services that will reach the patients on time.
Therefore, this change will have a positive impact on the
demand curve as more people will be willing to travel to access
medical care since they will spend less time on the roads.
Nursing home care is one of the safest bets for many patients
who need round the clock type of medical attendance and
attention. Therefore, this price decrease means that many more
patients will be able to access home nursing care at friendly
prices without much of a struggle. Hence a positive impact on
the demand curve.
Real income determines the ability of people to access and
attain medical care, covers, and insurance policies. Therefore,
having the rate decreasing means that people will not have an
easy time catering to the medical needs as their finances will
not easily allow them to relocate any funds. Considering the
income elasticity of demand equals 0.45, the reduced
revenue/income will make it difficult for anyone to priorities
their medical care demand.
percent.
Despite this increase taking place, it will raise the demand level
of the medical services as it will build the notion of better
medical facilities and more demand as well as quantity will be
required in return. Therefore, this will only raise the probability
of the demand ratio, (Fertig, Carlin, Ode & Long, 2018).
References

Fertig, A. R., Carlin, C. S., Ode, S., & Long, S. K. (2018).
Evidence of pent-up demand for care
after Medicaid expansion. Medical Care Research and
Review, 75(4), 516-524.
Xueni, C., & Hengpeng, Z. (2018). The Relationship Research
between Medical Insurance and
Medical Care Demand——The Policy Effect of
Adjustments of Medical Insurance
Treatment Through Differentiating Expense Section. Price:
Theory & Practice, 2, 007.
Deamand Shift
Real Income Increase 8 6 4 2 0 Care
Coverage Increase 4 2 0 Hospital Relocates 6 4
2 0 Discount-price-walk-in-clininc10 8 6 4
2 0
Demand
Price
Assignments The following Assignments should be completed
and submitted to the course faculty via the learning platform for
evaluation and grading. Submit your responses to these
questions in one WORD document. List the question first, and
then your response. Be sure to properly site your sources, both
in-text and with a reference list at the conclusion. If you use an
online source to support your answers, you must provide a
properly formatted link to the source. You should use APA
citation format and make sure your sources are credible. In most
cases, your responses should be no more than 400 words. Short
Answer Questions:
1. In your own words, use utility analysis and production theory

to explain why the demand curve for medical care is downward
sloping.
2. After reading the chapter on demand theory, a classmate
turns to you and says, “I’m rather confused. According to
economic theory, people demand a good or service because it
yields utility. This obviously does not apply to medical
services. Just last week I went to the dentist and had a root
canal, and you can’t tell me I received any utility or satisfaction
from that!” Explain to your classmate how utility analysis can
be used to explain why he went to the dentist.
3. Use a graph to illustrate how the following changes would
affect the demand curve for inpatient services at a hospital in a
large city. a. Average real income in the community increases.
coverage from 10 percent to 20 percent. c. The hospital
relocates from the center of the city, where a majority of the
people live, to a suburb. d. A number of physicians in the area
join together and open up a discount-price walk-in clinic; the
price elasticity of demand between physician services and
inpatient hospital services is À0.50.
4. Many elderly people have purchased medigap insurance
policies to cover a growing Medicare copayment. These policies
cover some or all of the medical costs not covered by Medicare.
Use economic theory to explain how these policies likely
influence the demand for health care by elderly people.
5. If you are covered by a private or a public insurance plan,
obtain a pamphlet outlining the benefits provided and the cost
of the plan. Are there any copayments or deductibles? If so, use
economic theory to explain how they may influence your
demand for medical care.
6. In your own words, explain what a fuzzy demand curve is.
Why does it exist? What are its implications? 15 BUS508 –
Economics of Health and Medical Care Course Syllabus
7. In reaction to higher input costs, a physician decides to
increase the average price of a visit by 5 percent. Will total

revenues increase or decrease as a result of this action? Use the
concept of price elasticity to substantiate your answer.
8. You have just been put in charge of estimating the demand
for hospital services in a major U.S. city. What economic and
noneconomic variables would you include in your analysis?
Justify why each variable should be included in the study, and
explain how a change in each variable would likely affect the
overall demand for hospital services.
9. Define own-price elasticity of demand, and explain how it is
related to the demand curve. Provide four reasons why the
demand for medical services is likely to be inelastic with
respect to its price.
10. You are employed as an economic consultant to the regional
planning office of a large metropolitan area, and your task is to
estimate the demand for hospital services in the area. Your
estimates indicate that the own-price elasticity of demand
equals À0.25, the income elasticity of demand equals 0.45, the
cross- price elasticity of demand for hospital services with
respect to the price of nursing home services equals À0.1, and
the elasticity of travel time equals −0.37. Use this information
to project the impact of the following changes on the demand
for hospital services.
percent.
Chapter 5
The Demand for Medical Care
(c) 2012 Cengage Learning. All Rights Reserved. May not be

copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
classroom use.
The Demand for Medical Care and the Law of DemandStock of
healthDurable goodGenerates utilityFollows law of diminishing
marginal utility
classroom use.
The Demand for Medical Care and the Law of
DemandProduction of healthInput: medical servicesFollows law
of diminishing marginal productivityUtility Function of the
quantity of medical care
classroom use.
The Demand for Medical Care and the Law of DemandMarginal

utility decreases becauseEach successive unit of medical care
generates a smaller improvement in healthLaw of diminishing
marginal productivityEach increase in health generates a
smaller increase in utilityLaw of diminishing marginal utility
classroom use.
Figure 5.1 - The Relationship between Utility and Medical Care
The shape of the utility curve illustrates that total utility
increases at a decreasing rate with respect to the level of
medical care consumed.
Utility
Quantity of medical care (q)
Utility
classroom use.
The Utility Maximizing RuleUtility-maximizing ruleMarginal
utility gained from the last dollar spent on each product is equal
across all goods and services purchasedMUq/Pq = MUz/PzMUq
– marginal utility derived from the last unit of medical care
purchased, qPq – price of physicians MUz – marginal utility
derived from the last unit of all other goods, z (composite

good)Pz – price of composite good
classroom use.
The Law of DemandInitial conditionOptimal mix of physician
services and all other goods; MUq/Pq = MUz/Pz If price of
physician services increasesMUq/Pq < MUz/Pz More
satisfaction per dollar from consuming all other goodsFewer
units of physician services and more units of all other goods are
purchasedMUq/Pq increases and MUz/Pz decreases, until
MUq/Pq = MUz/Pz
classroom use.
The Law of DemandLaw of demandInverse relation between
price and quantity demanded of physician servicesFor its
derivation, utility analysis, or the income and substitution
effects can be usedDownward sloping demand curvePricePer-
unit out-of-pocket expenseAfter the impact of third-party
payments has been taken into account

classroom use.
Figure 5.2 - The Individual Demand Curve for Physician
Services
The individual demand curve for physician services is
downward sloping, illustrating that quantity demanded
increases as the price of physician services drops.
Quantity of physician
services (q)
Price of physician
services
d
P0
P1
q0
q1
classroom use.
Substitution effectDecrease in price of physician
servicesConsumer substitutes away from the relatively higher-
priced medical goods like hospital outpatient servicesConsumer
purchases more physician servicesQuantity demanded for
physician services increases

classroom use.
Income effectDecrease in price of physician servicesIncreases
the real purchasing power of the consumer (real income)As
medical care is a normal goodQuantity demanded of physician
services increases with the rise in purchasing power
classroom use.
The Law of DemandLaw of demandInverse relationship between
quantity demanded of physician services and the priceThe
income and substitution effects can be used to derive this
relationship Demand for medical care = derived demandIt
depends on the demand for good health
classroom use.
Other Economic Demand-Side FactorsDemand for medical
services depends onIncomePrices of other goodsTime costs

classroom use.
Income Increase in incomeIncrease in purchasing powerIncrease
in demand medical servicesConsidering medical care to be a
normal goodDemand curve shifts rightDecrease in
incomeDemand curve shifts left
classroom use.
Figure 5.3 - Shifts in Individual Demand Curve for Physician
Services
Shift in the individual demand curve for physician services,
from d0 to d1, due an increase in income. At each price, the
consumer is now willing and able to purchase more physician
services.
Quantity of physician
services (q)
Price of physician
services
d0

d1
classroom use.
Prices of other goodsComplements in consumptionTwo or more
goods jointly used for consumption purposesAn increase in the
price of one good inversely influences the demand for the
otherDemand for eyewear and services of an
optometristPediatric services and obstetric services
classroom use.
Prices of other goodsSubstitutes in consumptionTwo or more
goods with similar characteristics providing the same utilityThe
demand for one good is directly related to a change in the price
of a substitute goodPhysician services and hospital outpatient
servicesGeneric and brand-name drugsEyeglasses and contact
lenses
classroom use.

Time costsMonetary cost of travelOpportunity cost of
timeDollar value of the activities the person forgoes while
acquiring medical servicesInversely related to the demand for a
medical serviceExamples of increasing time costsThe farther an
individual has to travel to see a physicianThe longer the delay
in getting an appointment
classroom use.
Health Insurance and the Demand for Medical CareGrowth of
health insurance coverageGreatly influenced allocation of
resourcesImpact on out-of-pocket payments for health care1960:
half of total expenditures2010: one-eighth of total expenditures
Impact on out-of-pocket payments for hospital care1960: about
21%2010: about 3%
classroom use.
CoinsuranceThe planConsumer pays some fixed percentage of
the cost of healthThe insurance carrier picks up the remaining
portionEffectively lowers the out-of-pocket price of health care

classroom use.
CoinsuranceDemand curve for medical careNegatively slopedA
consumer’s willingness to pay (marginal benefit) for each unit
of good falls as more of the good is consumedLaw of
diminishing marginal utilityUtility maximizationWillingness to
pay (marginal benefit) is equal to the out-of-pocket price
(marginal cost)
classroom use.
CoinsuranceEffective demand (Refer to slide 23 and 25)Demand
without insuranceConsumer’s willingness to pay for medical
services without health insurance coverdWOCustomer
surplusDifference between willingness to pay and market price
paid
classroom use.
CoinsuranceNominal demand (Refer to slide 23 and 25)Demand
with insurance, dWI Reflects total price paid for medical
servicesTakes into account the coinsurance paid by the
insuredInsurance coverage is the gap between the willingness to
pay (effective demand) and the actual price (nominal demand)

classroom use.
CoinsuranceP = actual priceC0 = fraction of P pay by
consumerPw = consumer’s willingness to payPw = C0P; P =
Pw/C0
classroom use.
The Demand Curve for Medical Services with Coinsurance
The graph illustrates how a coinsurance health plan impacts the
individual demand curve for physician visits.
$100
Quantity of medical services (q)
Per unit price
dWO
dWI
“Effective”
demand
“Nominal”
demand

5
$250
classroom use.
CoinsuranceReduction in coinsurance rate (C0)Nominal demand
curve, dWI, rotate clockwise and pivotdwi becomes steeperAt
zero willingness-to-pay priceInsurance has no bearing on
quantity demandedFull coverage (C0 = 0)Nominal demand curve
rotates out to its fullest extent and becomes completely vertical
classroom use.
Demand Curve for Medical Services with 100% Coverage
*
The graph illustrates the situation in which the individual has
complete medical coverage and the coinsurance rate is zero.
Office visits per year (q)
Price per
visit

dWI
Effective
demand
Nominal
demand
dWO
q0
classroom use.
Copayment CopaymentFixed amount paid by the
consumerIndependent of the market price or actual costs of
medical careDoes not automatically change with an adjustment
in costs of providing medical careLower copayment Movement
down the effective demand curve Greater quantity of care
demandedNo rotation of the nominal demand curve
classroom use.
Deductibles Deductible A fixed amount of health care costs per
calendar year paid by a consumer before coverage
beginsInsurance carrierPays all or some portion of the
remaining medical billsAfter the deductible is metDepends on

the plan
classroom use.
Deductibles From the insurance carrier’s perspectiveLower
administrative costsDecrease demand for medical careImpact on
demand for medical careDepends onCost of the medical
episodePoint in time when the medical care is
demandedProbability of needing additional medical care for the
remainder of the period
classroom use.
Moral HazardMoral hazardSituation in which consumers alter
their behavior when provided with health insuranceInsured
consumersTake fewer precautions to prevent illnessesShop very
little for the best medical pricesMay purchase more medical
care than they would have without insurance coverage
classroom use.

Noneconomic Determinants of the Demand for Medical
CareTastes and preferencesMarital statusA married individual
demands less medical careLiteracyEducated individuals tend to
seek more medical care (direct relationship)More use of home-
produced health care services (inverse relationship)Likely to
recognize early symptomsLifestyle (smoking, excess
drinking)Increased demand for medical care
classroom use.
CarePhysical and mental profileGender Females usually need
more medical services than malesChildbearingCertain diseases
are more prevalent in womenCardiovascular disease,
osteoporosis, etc.Race/ethnicityAge Older individuals demand
more for medical care
classroom use.
CareState of healthSicker people demand more medical
servicesSeverity of illnessQuality of careAssumed to be
positively related to the amount and types of inputs used to
produce medical careHigher demand for better quality of care

classroom use.
Demand for Medical CareQuantity demanded depends onOut-of-
pocket price, income, time costs, prices of substitutes and
complements, tastes and preferences, profile, state of health,
and quality of careMovement along the demand curveChange in
out-of-pocket priceShift of the demand curveChange in all the
other factors
classroom use.
Market Demand for Medical CareMarket demandTotal demand
by all consumers in a given marketHorizontal summation of the
individual demand curvesAmount of medical services that the
entire market is willing and able to purchase at every given
priceDownward sloping
classroom use.
Market Demand for Medical CareIntensive marginHow much
more or less of a product consumers buy when its price
changesExtensive marginHow many more or fewer people buy a

product when its price changes
classroom use.
The Fuzzy Demand CurveRelation between price and quantity
demanded is fuzzyLack of medical knowledgeProviders disagree
about the treatmentConsumers lack the information to make
informed choicesRely heavily on the advice of their physicians
Physicians, rather than consumers, choose medical services
Inability to accurately measure medical care
classroom use.
Figure 5.6 - The Fuzzy Demand Curve for Medical Care
The gray band represents the possible fuzziness of the demand
for medical care given uncertainty and the role of the physician.
Quantity of medical care
Price per
visit
D

classroom use.
The Fuzzy Demand CurveImplicationsFor a given priceSome
variation in the quantity or types of medical services
renderedFor a given quantity or type of medical servicePrice
differences can exist
classroom use.
Elasticities Elasticity of demandResponsiveness of quantity
demanded to a change in an independent factorOwn-price
elasticityIncome elasticityCross price elasticity
classroom use.
Own-Price Elasticity of DemandAmount of change in
consumption of a good or a service when its price changesED =
%ΔQD / %ΔPED – price elasticity of demand% ΔQD –
percentage change in quantity demanded% ΔP – percentage
change in price

classroom use.
Own-Price Elasticity of DemandED < 0Shows inverse
relationship between price and quantity demanded |ED| >
0Absolute value of the price elasticity of demand is
positive|ED| > 1Price elastic demand: |%ΔP| < |%ΔQD||ED| <
1Price inelastic demand: |%ΔP| > |%ΔQD|
classroom use.
Own-Price Elasticity of Demand|ED| = 1Unit elastic demand:
|%ΔP| = |%ΔQD| |ED| = 0Perfectly inelastic demand: |%ΔQD| =
0Vertical demand curve |ED| = ∞Perfectly elastic demand:
|%ΔP| = 0Horizontal demand curve
classroom use.
Own-Price Elasticity of DemandGreater elasticity
meansQuantity demanded is more sensitive to a change in
priceFlatter demand curve at any given priceElasticity of

demand varies withPortion of the consumer’s budget allocated
to the goodDecision-making time frameExtent to which the
good is a necessityAvailability of substitutes
classroom use.
Figure 5.7 - Elasticity of Demand and the Slope of the Demand
Curve
The figure illustrates the changes in quantity demanded for a
relatively inelastic and a relatively elastic demand curves, when
the Price changes from P0 P1.
Quantity of medical services(q)
Per unit price
Da (Relatively elastic)
Db (Relatively inelastic)
Q0
P0
P1
Qa
Qb

classroom use.
Own-Price Elasticity of DemandOwn-price elasticity of demand
for medical servicesInelastic with respect to priceBecause the
consumer typically pays a small portion of the cost of medical
servicesBecause medical services are sometimes of an urgent
natureMedical services are necessitiesMore elasticFor elective
medical care (luxury)If more substitutes available
classroom use.
Own-Price Elasticity of DemandTotal revenue, TR = P*QD
Effect on an increase in priceElastic demand: TR
decreasesInelastic demand: TR increasesUnit elastic demand: no
change in TR
classroom use.
Income Elasticity of DemandIncome elasticity of demand,
EYPercentage change in quantity demanded (%ΔQD) divided by
the percentage change in income (%ΔY)EY = %ΔQD / %ΔYThe
amount of change in demand for a product with change in real

income
classroom use.
Income Elasticity of DemandIf EY > 0 , normal goodAny
increase in income leads to an increase in quantity demanded If
EY < 0, inferior goodAn increase in income leads to a decrease
in the amount consumedMost types of medical care: EY > 0
classroom use.
Cross Price Elasticity of DemandCross-price elasticity,
ECExtent to which the demand for a product changes when
price of another good is alteredEC = %ΔQX / %ΔPZ %ΔQX:
percentage change in demand for good X %ΔPZ: percentage
change in price of good Z
classroom use.
Cross Price Elasticity of DemandIf EC < 0, complements in
consumptionIf EC > 0, substitutes in consumptionIf EC = 0,

unrelated goods
classroom use.
Empirical EstimationData unavailabilityDependent
variableQuantity of medical care consumedSuch as number of
physician visitsIndependent variablesNeed to include variables
for:Health insuranceConsumer’s incomeTime costPrices of
complements and substitutes
classroom use.
Own-Price, Income, Cross-Price,
and Time-Cost Elasticity EstimatesDemand for primary health
careRelatively inelasticTotal expenditures on hospital and
physician services increase with a greater out-of-pocket
priceDemand for other types of medical careSlightly more price
elastic than the demand for primary carePercentage of out-of-
pocket payments tend to be the lowest for hospital and
physician services

classroom use.
Table 5.2 - Price Elasticity of Demand for Health Care: Selected
StudiesDependent variableStudyElasticityCountry Medical
expendituresEichner (1998)
Newhouse and the Insurance
Experiment Group (1993)
Phelps and Newhouse (1974)
Rosett and Huang (1973)
Van Vliet (2001)-0.62 to -0.75
-0.17 to -0.22
-0.04 to -0.12
-0.35 to -1.5
-0.079United States
United States
United States
United States
NetherlandsHospital Care
Admissions
Hospital Inpatient
Hospital Outpatient
Manning et al. (1987)
Davis and Russell (1972)
Davis and Russell (1972)
Bhattacharya et al. (1996)
-0.1 to -0.2
-0.32 to -0.46
-1.0
-0.12 to -0.54
United States
United States
United States
Japan Patient DaysFeldman and Dowd (1986)-0.74 to -

0.80United StatesPhysician VisitsCockx and Brasseur (2003)-
0.13 to -0.03Belgium Total and Elective surgeryCromwell and
Mitchell (1986)-0.14 and -0.17United States
classroom use.
Table 5.2 - Price Elasticity of Demand for Health Care: Selected
StudiesDependent variableStudyElasticityCountry Nursing home
care
Probability of entering a nursing home
Number of patients
Patient days
Number of patients
Headen (1993)
Nyman (1989)
Lamberton et al. (1986)
Chiswick (1976)
-0.7
-1.7
-0.76
-2.3
United States
United States
United States
United StatesDental ServicesManning and Phelps (1979)
Mueller and Monheit (1988)-0.5 to -0.7
-0.18United States

United StatesPrescription Drugs
Number
Expenditures
Smith (1993)
Contoyannis et al. (2005)
-.10
-0.12 to -0.16
United States
Canada
classroom use.
Own-Price, Income, Cross-Price,
and Time-Cost Elasticity EstimatesIncome elasticity of
demandHousehold dataHealth care: normal good, with income
elasticity < 1Country-level data Aggregate income elasticity is
slightly >1 Health care: luxury goodTravel time elasticity of
demandApproximately equals to own-price elasticity
classroom use.
The Impact of Insurance on the Demand for Medical CareRAND
Health Insurance Study (HIS) (Manning et al., 1987)Families

were randomly assigned14 different fee-for-service health
insurance plansTest: impact of differences in insurance
coverage on the demand for medical care
classroom use.
The Impact of Insurance on the Demand for Medical
CareResultsAs the level of coinsurance risesConsumers demand
less medical careConsumers cut back on the number of visits to
health care providers and not on the amount spent on each
visitThe probability of using any medical services, along with
total medical expenditures diminishesOwn-price elasticity of
demand is sensitive to the level of insuranceConsumers become
more sensitive to price changesNegative impact of deductibles
on the consumption of medical care
classroom use.
Table 5.3 - Sample Means for Annual Use of Medical Care per
Capita

classroom use.
The Impact of Noneconomic Factors
on the Demand for Medical ServicesAge and severity of
illnessDirectly influence the demand for medical care Overall
health of the individualInversely affects the demand for medical
careEducationNo consensusDirect impact: greater willingness to
seek careOffset by the inverse effect (a greater ability to
produce health care at home
classroom use.
on the Demand for Medical ServicesEffect of medical
knowledge on the demand for medical carePositive
relationshipConsumers with a more extensive background in
medicine tend to consume more medical servicesConsumers
with a lack of medical knowledge tend to underestimate the
impact of medical care on overall healthOften fail to consume
an appropriate amount
classroom use.

on the Demand for Medical ServicesEffect of medical
knowledge on the demand for medical careYears of schooling,
whether the individual worked in the health care field, medical
insurance, and incomePositively influenced the level of health
information acquiredAge and whether the individual drank or
smokedInversely affected the quantity of health information
collected
classroom use.
Patient Protection and Affordable
Care Act (PPACA) of 2010Objectiveto extend health insurance
coverage to millions of uninsured AmericansApproachMedicaid
to cover all non-Medicaid under the age of 65 with incomes up
to 133 percent of the federal poverty levelAll individuals
mandated to have health insurance coverage by 2014Those elect
not to acquire insurance will face a penalty
classroom use.
Patient Protection and Affordable
Care Act (PPACA) of 2010ApproachStates required to design
and create American Health Benefit ExchangesProviding

individuals and small businesses access to affordable health
insuranceOffering health plans with an established set of
minimum benefitsProviding subsidies to those who cannot
afford the premium paymentsA number of insurance market
regulations

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