Demand Some Basics Why demand 30 Money Price

Demand Some Basics

Why demand? 30 Money Price • We want to look at what consumers do. • Demand is related to total expenditures • What happens to total expenditures if price increases? • A> It depends on the elasticity 40 20 10 Total Exp. Money price demand Total Exp. Visits

What determines elasticity? Back to Indifference Curves pv visits Spam • What happens to quantity demanded as price changes? • Let’s hold utility constant. v 3 v 2 v 1 visits

What determines elasticity? (2) pv visits no change! Spam • What happens to quantity demanded as price changes? • Let’s hold utility constant. • Why? Discuss v 3 v 2 v 1 visits

Elastic and inelastic demand 30 Elastic Money Price • So, we derive demand curves. • Some are MORE responsive to price than others. 40 20 10 Inelastic Visits

Income elasticity 30 Quantity • What is income elasticity? • %ΔQ/%ΔY • What does this have to do with total expenditures? 40 20 10 Inelastic Income

Demand for Health Care • General models suffice … BUT • We want to look at the role of time and the role of insurance. • WHY? • Because often out-of-pocket costs are the smallest parts of the price of health care.

Time Costs Full price demand Money Price 60 40 20 80 60 $25 Full Price • Suppose a visit costs $50. • BUT, parking and travel costs $10. • Visit takes 1 hour @ $15 – Why? 80 40 Money price demand Visits 20

Time Costs • KEY !!! Must look at blue line, because it adds time and $ costs. Full price demand 60 40 20 80 60 Money Price • Suppose that a clinic opens up nearby? What happens? 80 Full Price • So, which curve is the one that applies. • Suppose money price falls to 0. What happens to quantity demanded? 40 Money price demand Visits 20

Insurance Money Price 60 Effective demand 80 What’s This? 40 20 60 Effective Price • Suppose a visit costs $60. • BUT, insurance pays 50%. 80 40 Money price demand Visits 20

Fundamental Problems with Demand Estimation for Health Care • Measuring quantity, price, income. • Quantity first. It is typically very difficult to define quantity. • We usually look at the stuff that is easiest to measure. Things like visits, days of service, and the like.

Problems w/ Demand Estimation • The problem here is that the measures may not be meaningful. • 5 days of inpatient care for observation is obviously not the same as 5 days of inpatient care for brain surgery. • We could argue that 5 visits reflects more treatment than 4 visits, but it could simply indicate that the first 4 visits were not effective.

Episodes • Episodes represent what may be a more theoretically desirable measure of output in a number of ways. • An episode starts when someone starts to need treatment, and ends when they no longer need it. • For example, an episode may include a few visits to the doctor, some inpatient hospitalization, and maybe some follow-up clinic visits.