Demand for Healthcare (L2)

Question 1

Describe Demand Curves

Answer 1

typically downward sloping
price on y axis, quantity on x axis
single downward sloping line

Question 2

Why does quantity increase as price decreases?

Answer 2

1. Substitution effect
2. Income effect (competing resources)
3. Decreasing marginal utility (each additional unit yields less benefit)

Question 3

elasticity

Answer 3

measures the degree of downward-slopedness in demand curve. Elastic demand means its price sensitive (changes in price affect quantity demanded). Inelastic means price insensitive (changes in price do not significantly change the quantity demanded - vertical line on demand curve)

=% change in quantity demanded / % change in price
usually between 0.5 and 1.5 (elastic demand >1)

Question 4

5 cases of elasticity

Answer 4

1. Elastic demand - E»1

2. Inelastic demand - 0

Question 5

Why is elasticity important (for firms, governments)?

Answer 5

1. Determines how much revenues are affected when price changes
2. effects of policies depend critically on elasticity of demand and supply curves
3. Strong implications for effects of tax policies, user fees, and government subsidies

Question 6

full subsidy

Answer 6

give away for free

Question 7

cost-sharing

Answer 7

charge a small fee from user

Question 8

arc elasticity

Answer 8

= [delta Q / (Q1+Q2)] / [delta P / (P1+P2)]

uses midpoint of two points on curve to deal with multiple starting values