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Unformatted text preview: Microeconomic Model of Microeconomic Model of Demand for Health Care
Class 3 Loyola University Chicago Prof. Tim Classen January 24, 2011 Class Outline
Wrap up Course Introduction Trends in Uninsured Model of Utility from Health Percent Who Didn’t Receive Needed Care Due to Cost, 2008 Profile of U.S. Health Profile of U.S. Health Insurance, 2008 Age profile of uninsured, 2009 Age profile of uninsured, 2009 Economic Model of Demand for Health Care Model of Health Demand Model of Health Demand
Economists model health as the output from multiple inputs (i.e., health care, food consumption, behaviors) Utility = U(X,H) measures utility from given level of consumption (X) and health H=f(medical care, disease, Xbad . . . ) Diminishing marginal returns to Medical Care Health depreciates over time Diminishing Marginal Utility Diminishing Marginal Utility Implications Implications Utility is derived from health which is produced by Medical Care (M) and X. Thus, demand for M depends on the prices of M and X. The marginal utility of medical care can be divided as: Demand for Medical Care is thus derived demand But how to measure improvement in health from medical care? A) Change in utility from an improvement in health and B) Improvement in health from an increase in medical care Measures of pain, numerical measures of health (BP, cholesterol, blood sugar), survival rates Marginal and Average Marginal and Average Productivities of Medical Care Clearly there are large improvements to health from medical care on average Relevant issue is how does health change on the margin ∆H Avg. productivity = H/M Marginal productivity = ∆M Obviously will vary depending on how health is measured Effect is often smaller than expected Life expectancy, (infant) mortality rates Daily activities, wellbeing harder to measure (QALYs) Indifference Curves Indifference curves are an expression of preferences
Health Health q’H qH q’A qA All Other Goods q’H qH q’A qA All Other Goods A person who cares more for Goods than Health A person who cares much more for Health than Goods MRS and diminishing marginal utility The MRS at bundle X is greater than at Y q ‘Principle of diminishing MRS’ is a consequence q’ of the ‘principle of diminishing marginal utility’: Goods are worth less to the consumer at bundle Y Health MRS = MUAOG/MUH X H The consumer is more willing to trade away more Goods for Health at bundle Y (than at bundle X) Y H qA q’A AOG Production Possibilities and Budget Sets Production of Health results in fewer Goods H=g(MC,X) So, MUmc=MUH*g’(MC) H0 U1 Medical Care AOG0 AOG MUH falls as health rises due to diminishing marginal utility MC0 g’(MC) falls as medical care increases due to diminishing marginal Health H0=g(MC0,AOG0)
Slope=-MUAOG/MUmc Slope=-pAOG/pmc U1 AOG0 AOG Optimal consumption choice
Medical Care Optimal consumption
pAOG pMC = MUAOG MUMC MUAOG
AOG slope of the budget line:- pAOG pMC or p q Marginal utility per dollar spent must be the same for medical care and AOG MUMC pMC = slope of MUAOG IC = MRS = MUMC A qB AOG Response to price changes in medical care
Medical Care I/P 1 I/P2
1 2 ILL Those with illness will reduce medical care by less (in %) than those without illness in response to price change Non-ILL have steeper I.C. due to low MUmc Not ILL MC MC MC3 MC4 AOG2 AOG1 AOG Optimization generates demand curve for Medical Care
Price Demand of Non-ILL P2 P1 Demand of ILL MC4 MC3 2 1 Medical Care Influences on Demand for Medical Care Price of Medical Care (Duh!) Illness Level & Age Insurance Status & Generosity of policy Income & Education Time cost of travel to doctor + waiting Price of complements & substitutes Could lead to worse health from “fast lane” living (Paris Hilton) requiring more medical care Related to health insurance & employment Are hospital and ambulatory care complements or substitutes? Preventive vs. acute care? ...
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