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Lecture Health economics - Chapter 3: Demand for medical services (Part 1)

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 1 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 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? Medical Care and Utility Define : MU = marginal utility of medical care P = price q = quantity of medical services z = quantity of all other goods Consumer’s Optimal Choice of Health tradeoffs Given the consumer’s income, she chooses q and z to maximize utility. Utility maximization rule : MUq MUZ Pq Pz Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalized Consumer’s Optimal Choice of Health i.e. The consumer equalizes “the bang for the buck” across all goods Proof Suppose that instead : MUq MUZ Pq Pz > Then MUq would fall, MUz would rise, until the 2 ratios are equalized 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) Deriving a Demand Curve for Physician Visits Suppose Pq rises. This will lead to : MUq MUz Pq Pz Deriving a Demand Curve for Physician Visits Downward sloping demand curve for physician visits Price P1 P0 q0 q1 Price changes lead to movements | Demand for Medical Services Part 1 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 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? Medical Care and Utility Define : MU = marginal utility of medical care P = price q = quantity of medical services z = quantity of all other goods Consumer’s Optimal Choice