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The price elasticity of demand for health care has been estimated to be −0.2. Characterize this demand as price elastic, unit price elastic, or price inelastic. The text argues that the greater the importance of an item in consumer budgets, the greater its elasticity. Health-care costs account for a relatively large share of household budgets. How could the price elasticity of demand for health care be such a small number?

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Related questions

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

Case Study: Mental Health Parity

Presenting to the board, Chris spoke with passion. Our insurance plan should provide the same coverage for mental health services as for other medical services. It's the right thing to do, and it's good business. If our employees or their dependents have untreated mental health problems, the employees become less productive and waste money getting treated for other stuff. Thank you, Chris,€ said Kerry, the company's CEO. This is an important question for us, and the Benefits Committee will carefully consider it. After Chris left the room, Kerry turned to Jordan, the director of human resources, and said, Jordan, what's your take on this? There are actually two questions here, said Jordan. First, how elastic is the demand for ambulatory mental health services? How much will the use of mental health services increase if coverage improves? Second, how effective is mental health care? This second question is the more important one because good mental health care can have such powerful effects. Now, a number of studies have concluded that the use of mental health services is more price-sensitive than the use of other ambulatory care. Analyses of ambulatory mental health services have found elasticities ranging from 0.44 to 1.00. These results could be statistical flukes. Consumers who expect to use mental health services may choose insurance plans that offer generous coverage for those services. However, the RAND Corporation researchers Keeler, Manning, and Wells in 1988 used data from the RAND Health Insurance Experiment, which randomly assigned respondents to insurance plans, to resolve this issue. The RAND analysis generally confirmed that the demand for mental health services is more price-sensitive than the demand for general ambulatory medical services. Demand for each is inelastic, but the elasticity for mental health services is 0.8 and the elasticity for other outpatient services is 0.3. Most consumers will not use any mental health services, but plans that offer generous mental health benefits will cost more. We can't ignore this. I'm confused,€ said Addison, an internist on the board. In 2012 McConnell and colleagues published a study showing that Oregon's law requiring mental health parity in commercial insurance plans had little effect on spending. How could that be? Real-life appears to be contradicting the RAND study. I'm sure the plans for federal employees used managed care techniques to control spending,€ Jordan jumped in. And mental health spending isn't the issue. The issues are what happens to other healthcare spending and what happens to our workers. I'm pretty sure there's good evidence showing that effective mental health treatment can reduce other costs and improve productivity.

Discussion questions:

Why does it matter whether demand for mental health services is more elastic than demand for other services?

The price elasticity of demand for ambulatory mental health services appears to be about 0.8, and the price elasticity for general ambulatory medical services appears to be about 0.3. How much would spending increase for each type of care if copayments were cut from $40 to $25?

What managed care techniques do insurers use to control spending?

Is there evidence that better treatment of mental health problems reduces other spending?

Is there evidence that better treatment of mental health problems improves productivity?

What is your recommendation to the Benefits Committee?

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

  • Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
  • Provide examples on how the availability of close substitutes affects price elasticity of demand.
  • Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

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