Introductory Health Economics

This document provides study material on introductory health economics. It covers topics such as price elasticity, externalities, production costs, and supply-induced demand. The document includes explanations, examples, and graphs to help understand the concepts.

Running head: INTRODUCTORY HEALTH ECONOMICS
Introductory Health Economics
Name of the Student
Name of the University
Course ID

1INTRODUCTORY HEALTH ECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................2
Question 2..................................................................................................................................3
Question a...............................................................................................................................3
Question b..............................................................................................................................3
Question c...............................................................................................................................4
Question 3..................................................................................................................................4
Question a...............................................................................................................................4
Question b..............................................................................................................................5
Question c...............................................................................................................................5
Question d..............................................................................................................................5
Question 4..................................................................................................................................6
Question a...............................................................................................................................6
Question b..............................................................................................................................6
Question c...............................................................................................................................7
Question 5..................................................................................................................................8
Question a...............................................................................................................................8
Question b..............................................................................................................................9
References................................................................................................................................10

2INTRODUCTORY HEALTH ECONOMICS
Question 1
Question a
The price elasticity for GP consultations is given as -0.2. If the government promises
to reduce the co-payment of GP services by 10% then this will likely to increase the demand
for GP consultation by (-0.2 *10%) = 2%. As obtained from the estimate, the proportionate
decrease in price is less than the proportionate increase in demand (Baumol and Blinder
2015). The total expenditure on GP services therefore decreases following a reduction in co-
payment of GP services.
Question b
For energy department service, the price elasticity is given as -0.05. Therefore, if a
price rise of 10% is imposed on energy department service, then use of energy department
service will be lowered by (0.05*10) = 0.5 percent.
Question c
Figure 1: Effect of a decrease in co-payment for GP consultations

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In the above figure, the quantity of GP consultation service is given by the line BL.
The initial indifference curve of the consumer is IC1. The equilibrium is attained at point E1
with consumption of GP consultation and Emergency Department being X1 and Y1
respectively. Now if the co-payment for GP consultation decreases then budget line shifts
pivotally to BL1. The consumer now reaches to a higher indifference curve to IC2. The new
equilibrium now is at E3 (Cowell 2018). The use of GP consultation service increase to X3
while that for emergency department either increases to stays the same. Assuming GDP
consultation is a normal good both income effect (IE) and substitution effect (SE) are
negative.
Question 2
Question a
Externalities refer to the external benefit or costs associated with production or
consumption of a certain good that direct consumers or producers do not take into
consideration. The tobacco smoking is considered as a negative externality in terms of
imposition of a higher cost on the health care system following increased use of heath care
because of smoking. The passive smoking imposes cost on women, children and other non-
smokers by causing asthma and other diseases (Nicholson and Snyder 2014). The smokers do
not consider the cost imposed on non-smokers. The tobacco smoking thus is associated with
entailing externalities on the society.
Question b
a.As discussed above tobacco smoking imposes an external cost non-smokers in terms of
causing different diseases and hence, are considered as negative externalities.
b. As third parties get affected from consumption of tobacco, these are consumption
externalities.

4INTRODUCTORY HEALTH ECONOMICS
Question c
Figure 2: Tobacco consumption and dead-weight loss
When negative externalities are present in tobacco consumption, the marginal social
benefit is less than marginal private benefit. Under free market, equilibrium is set where
marginal private benefit matches with marginal social cost. The associated equilibrium price
and quantity are P* and Q* respectively. The socially efficient outcome is occurred where
marginal social cost matches with marginal social benefit. The overproduction of tobacco
products results in a deadweight loss to the society.
Question 3
Question a
Quantity
produce
d
Fixe
d
cost
Variabl
e cost
Tota
l
cost
Averag
e total
cost
Averag
e
variable
costs
Margina
l cost
0 50 0 50
1 50 50 100 100.00 50.00 50
2 50 70 120 60.00 35.00 20
3 50 85 135 45.00 28.33 15
4 50 95 145 36.25 23.75 10
5 50 110 160 32.00 22.00 15
6 50 130 180 30.00 21.67 20

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7 50 155 205 29.29 22.14 25
8 50 185 235 29.38 23.13 30
9 50 220 270 30.00 24.44 35
10 50 260 310 31.00 26.00 40
Question b
From the table, it has been observed that with increase in output, marginal cost fist
decreases, reaches to the minimum and then starts to increase. Initially, with increase in
output, the total cost and variable cost of production increases at a diminishing rate (Mahanty
2014). The law of diminishing returns and presence of economies of scale cause marginal
cost to fall unless it reaches to minimum. The marginal cost increases as output increases.
Question c
Quantity
produce
d
Fixe
d
cost
Variabl
e cost
Tota
l
cost
Averag
e total
cost
Averag
e
variable
costs
Margina
l cost
Total
Revenu
e
Margina
l
Revenue
Profit
0 50 0 50 0 -50
1 50 50 100 100.00 50.00 50 31 31 -69
2 50 70 120 60.00 35.00 20 62 31 -58
3 50 85 135 45.00 28.33 15 93 31 -42
4 50 95 145 36.25 23.75 10 124 31 -21
5 50 110 160 32.00 22.00 15 155 31 -5
6 50 130 180 30.00 21.67 20 186 31 6
7 50 155 205 29.29 22.14 25 217 31 12
8 50 185 235 29.38 23.13 30 248 31 13
9 50 220 270 30.00 24.44 35 279 31 9
10 50 260 310 31.00 26.00 40 310 31 0
Question d
In a perfectly competitive market, optimal level of production is determined where
price equals marginal cost of production (Jain and Ohri 2015). Price in the market is given as
$31. Price is closely equals marginal cost of production corresponding to the output level of

6INTRODUCTORY HEALTH ECONOMICS
8. Marginal cost of production at this level of production is 30. Beyond this level of
production, marginal cost exceeds market price. The optimum level of production for the firm
thus is 8.
Question 4
Question a
The demand function for physiotherapy service is given as
QD=26− 1
2 P
The supply function for physiotherapy service is given as
Qs =P−40
Figure 3: Demand and supply function of physiotherapy service
Question b

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Equilibrium occurs when market demand matches with market supply (Freeman
2013).
Demand=Supply
¿ , 26−1
2 P=P−40
¿ , P+ 1
2 P=26+ 40
¿ , 3
2 × P=66
¿ , P=66 × 2
3
¿ , P=44
Equilibrium Quantity
Q=P−40
¿ 44−40
¿ 4
Equilibrium price in the market is $44 and equilibrium quantity in the market is 4.
Question c

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Figure 4: Effect of price floor in the market
If government imposes a price floor of $50, then quantity supplied will exceed that of the
quantity demanded resulting in an excess supply in the market.
Quantity demanded at price $50,
QD=26− 1
2 P
¿ 26−1
2 ×50
¿ 26−25
¿ 1
Quantity supplied at price $50,
Qs =P−40
¿ 50−40
¿ 6
Question 5

9INTRODUCTORY HEALTH ECONOMICS
Question a
Supplier-induced demand
Supply induced demand in economics refers to a situation where asymmetry
information exits between consumer and supplier. Here, the suppliers using greater
information can encourage individuals to demand a larger quantity of goods and services that
they supply compared to Pareto efficient level (Mankiw 2014). One instance of supply-
induced demand is that found to exist in the doctor-patient relationship. Doctors here act as
an agent for the patients and can use the discretionary power to involve in demand shifting or
demand inducing behavior of the patients.
Figure 5: Supplier induced demand
The above demand and supply model indicates an increase in quantity resulted from
an increase in supply. Supply induced demand is identified when there is a sufficient increase
in demand to cause an increase in price.
Question b

10INTRODUCTORY HEALTH ECONOMICS
The supply-induced demand encourages individual consumer to demand a larger
quantity of goods or services that they supply compared to the Pareto efficient level. The
presence of information asymmetry leads a welfare loss, which is a cause of concern for the
economists. The existence of supply induced demand in an industry causes misallocation of
resources in the society (Goodwin et al. 2015). For example, in the healthcare system,
supplier induced demand increase expenditures of healthcare, raises financial burden on
public health insurance program and raises share of economic resources spent on national
health care system.
References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Freeman, C., 2013. Economics of industrial innovation. Routledge.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Principles of
economics in context. Routledge.
Jain, T.R. and Ohri, V.K., 2015. Principal of Microeconomics. FK Publications.
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Mankiw, N.G., 2014. Principles of economics. Cengage Learning.
Nicholson, W. and Snyder, C., 2014. Intermediate microeconomics and its application.
Nelson Education.

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