Lec3_Demand1_handout

Lec3_Demand1_handout - Demand for Medical Services Demand...

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Unformatted text preview: Demand for Medical Services Demand for Medical Services Part 1 Part 1 Health Economics Professor Vivian Ho Fall 2009 Outline 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 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 Consumers Optimal Choice of Consumers Optimal Choice of Health Health tradeoffs Given the consumers income, she chooses q and z to maximize utility. Utility maximization rule : MU q MU Z P q P z Total utility reaches its peak when the marginal utility gained from the last $ spent on each product is equalized Consumers Optimal Choice of Consumers Optimal Choice of Health Health i.e. The consumer equalizes the bang for the buck across all goods Proof Proof Suppose that instead : MU q MU Z P q P z > Then MU q would fall, MU z 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 Deriving a Demand Curve for Physician Visits Physician Visits Suppose P q rises. This will lead to : MU q MU z P q P z < Note : Now let q represent physician visits Consumer can U by purchasing less q, and more z P q lower demand for q Deriving a Demand Curve for Deriving a Demand Curve for Physician Visits Physician Visits Downward sloping demand curve for physician visits Price P 1 P q q 1 Price changes lead to movements along D curve Deriving a Demand Curve for Deriving a Demand Curve for Physician Visits Physician Visits (cont.) (cont.) Consumers purchase of medical care is a derived demand i.e., no direct utility from visiting the doctor U derived from health resulting from dr. visit: U = U(h,z) h = h(q,) Other Economic Factors...
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Lec3_Demand1_handout - Demand for Medical Services Demand...

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