Health Sciences 3840B Lecture Notes - Lecture 6: Induced Demand, Utility, Marginal Utility
30 May 2018
School
Department
Course
Professor
Need depends on society’s conception?
Need (but you don’t want it, which is why it’s not demand. Or but you can’t afford it which is why it’s not demand)
Gross cough syrup
Need and Demand but you don’t utilize
Waiting for care, surgery (might have the insurance for it and stuff, but long wait times)
Utilized but not needed or demanded
Supplier-induced demand, we don’t always know what is best for us, if the physician has an incentive to prescribe some good or service
You may not need it, and you don’t know about it to express demand but you trust the physician
Demand
Want but unnecessary
Demand and utilize (but don’t need)
Cell phone
Lip filler
Needed and utilized but not demanded
Good quality air vs. bad quality air (Free, no market)
Health care service that somebody needs and they are forced to use
Ex. If you don’t want a blood transfusion because of religious reasons but you are forced to have one
Ultimately health status goes into utility function
What is the increase in utility for one more unit of consumption? Marginal utility
First equation
The marginal benefit doesn’t just depend on X but it also depends on everything in the utility function
E.g. if you’re eating a sandwich it might help you if you’re healthy but not if you’re sick
Assume the individual knows what their marginal benefit is, e.g. how much they like eating a sandwich
An individual probably knows how much better off they get when they become healthier
But might not know how much an increase in health care is going to impact health status
How much more health status you get when you have one more unit of health care
Formula: increase health care = more health status = more utility
U/HS is individual knows
HS/HC, the individual may not know how it translates into health status
Production takes labour and capital (physical stuff like the room)
We can use capital to produce consumption goods or more capital that can be used in the future
We often assume that more is always better, might plateau but it doesn’t go down because you have the choice to not consume right away
When health status is low you have a high marginal utility –more benefit in small health improvements
You don’t demand health care for itself, but because it has an impact on your health status
Demand for health care is derived from the demand for health status
HS enters the utility function and not HC directly
Related to individuals not knowing the marginal utility of health care?
In the same way a firm invests in their physical capital, an individual invests in human capital
Depreciates over time (skills and knowledge) –making an investment now in that, later it’ll depreciate (you’ll forget)
If we think about human capital as something you can invest in and last over time, makes sense to make investments in human capital early
More valuable to make investments when a kid is young, important to invest in early childhood education –benefit of an additional dollar is more when
invested into a kid vs high schooler because they have greater human capital for more of their life
Healthier means you feel better but also that you can function better (e.g. study better for your courses, etc.)
Physical capital –need to make investments in to maintain it. Same with health!
Human capital –can make us more productive
E.g. learning stuff in one course that applies to another course
Benefit is decreasing the higher the stock you have
See agenda (Week March 5)
Lec 6 Individual Demand
May 6, 2018
3:45 PM
Health Economics Page 1
Document Summary
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