chapter 5 demand for medical services4784

7/28/2019 Chapter 5 Demand for Medical Services4784

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Chapter 5:Demand for Medical Services

and Medical Spending

Health Economics


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Outline

Theoretical derivation of the demandcurve for medical services.

Economic and noneconomic variables

that influence demand. Elasticities.

The impact of health insurance on

demand.


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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


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Medical Care Utility MU

1 2

2 4

3 6

4 8

Example: Do the following values of MedicalCare and Utility imply diminishing marginalutility of care?


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Graph this relation between medical care and

utility.

2

4

6

8

4321

Medical Care

Utility


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Because this relation is linear, it canalso be represented using the followingalgebraic equation:

Utility = 2*Medical Care

In practice one would never see thisrelation between utility and medicalcare, because it violates the assumption

of diminishing marginal utility.


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Medical Care Utility MU

1 2

2 6

3 9

4 11

Example: What about these values? Do theysatisfy the law of diminishing marginal utility?


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Graph this relation between medical care and

utility.

2

4

6

8

4321

Medical Care

Utility

10


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The previous graph illustrates anexample of diminishing marginal utility

Because each additional unit of medicalcare yields a smaller increase in utility,the relation cannotbe graphed using astraight line.


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We can generally graph the relation betweenmedical care and utility as follows:

Utility

MedicalCare


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The graph shows that as the levelofmedical rises, each additional unit ofmedical care yields a smaller increasein utility.

Given this fact, how does the consumerdecide how much health care topurchase?


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Define : MU = marginal utility of medical care

P = price

q = quantity of medical services

z = quantity of all other goods

Consumers Optimal Choice of

Health

tradeoffs

Given the consumers income, she chooses q

and z to maximize utility.

Utility maximization rule :

MUq MUZ

Pq Pz


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Total utility reaches its peak when themarginal utility gained from the last $ spenton each product is equalized.

Consumers Optimal Choice of

Health

i.e. The consumer equalizes the bang for the

buck across all goods.


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Proof

Suppose that instead :

MUq MUZ

Pq Pz

>

Then MUq would fall, MUzwould rise, until the 2 ratiosare equalized.

Last $ spent on medical care generates more U thanlast $ spent on other goods

Consumer could U by purchasing more medical care

(q), and less other goods (z).


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Deriving a Demand Curve forPhysician Visits

Suppose Pq rises. This will lead to :

MUq MUz

Pq Pz

chapter 5 demand for medical services4784

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