Download Chapter 9 Consumer Choice and Demand

Chapter 9 Consumer Choice
and Demand
1.
Applying the standard budget constraint model
2. Two additional demand shifters-time and
coinsurance
3. Issues in measuring health care demand
4. Empirical measurements of demand elasticities
5. Impact of insurance on aggregated expenditure
6. Other variables affecting demand
Applying the standard budget constraint
• Figure 9-1 demand for health capital determines
the optimal amount of the home goods and
health capital investment
(consumers is rational and perfectly informed)
• The consumer’s equilibrium (see Figure 9-3)
MRS (want to trade)=price ratio (be able to trade)
• Demand shifters
Figure 9-3 => 9-4 (Demand curve derived from
the standard budget constraint changes)
• Price elasticity: Ep=(dQ/Q)/(dP/P)=(dQ/dP)*(P/Q)
• Income elasticity:
Ey=(dQ/Q)/(dY/Y)=(dQ/dY)*(Y/Q)
• Health status and demand
Figure 9-5 Changed Preferences due to illness
(1) Additional demand shifters-time
• Time cost: the time spent acquiring services
• A example if money price increase $5 (Figure 9-6):
1. one hour of time valued at $10 (30 min travel+20 min
wait+10 min doctor visit)
2. one visit priced at $25
3. travel and parking costs at $5
Ep (full price)=(-1/5.5)/(5/42.5)=-1.545
Epm(money price)=(-1/5.5)/(5/27.5)=-1
• The money price elasticity is smaller than the full price
elasticity by the same proportion as the money price is
smaller than full price
Pm/(Pm+Pt)=27.5/42.5=0.647
Epm/Ep=-1/-1.545=0.647
• Table 9-1 Acton’s time valuation Equation (1975, 1976)
1. the importance of time (Et=-0.958)
2. outpatient visits and physician visits are substitutes
(Et=0.64)[t:own-time price for outpatient visits]
• Subsequent work usually supports an important role of time
(2) Additional demand shifters-coinsurance
• Figure 9-7: The effect of a coinsurance rate on
health care demand
1. Insurance will increase demand for health
care (Q1->Q”1)
2. Insurance will make demand for health care
less elastic
• Figure 9-8 Market effect (a upward-sloping
supply curve)
Health Expenditure increases from P0V0 to
P1V1
Issues in measuring health care demand
• Q: why do the reported elasticity vary so often?
• Individual and market demand function:
Individual: the total quantity of visit
market aggregate: the number of visit per capita
• Measurement and definitions
1.quantities of services in dollar; quantity of visits,
patient days, or cases treated
2. the price of services
• Differences in the study populations: Minnesota
VS Florida
• Data Resource: Insurance claim VS health
interview
• Experimental and not experimental data
Empirical Measurements of demand Elasticitiesprice elasticity
• Table 9-2 Price Elasticities from selected
studies: most reported elasticities range
between 0.0 and -1.0
e.g. market aggregate
• Table 9-3 Firm (physician)-specific Price
elasticites are higher
the degree of market competition
• few substitutes for physician care, but
many substitutes among individual
physicians
Empirical Measurements of demand
Elasticities-income elasticity
• Normal VS inferior; necessary VS luxury
• From table 9-4, health care are considered
as “necessary goods”
• luxury goods in most cross-national
studies
• Q: why is it inconsistent with individual and
national data?
A: Getzen (2000): national data shows
technologies and economic well-being
Empirical Measurements of demand
Elasticities-insurance elasticity
• A fixed coinsurance rate: the same as the
price elasticity
net price=r*P
• Adverse selection problem from nonexperimental data
• Rand experimental data (1974): price and
insurance do matter considerably.
Other variables affecting demand
• Ethnicity and gender
1.Blacks tend to consumer less
2.Females consumers difference in life stage
• Urban Versus Rural
less care in rural: tastes, health status or longer travel
distance?
• Education
1.efficient health producer or lower time preference
2.confounding factor: income
• Age
• Health status:
Wedig (1988) smaller price elasticity for sicker people
• Uncertainty: higher precautionary demand for elderly