In your own words use utility analysis to explain why people

In your own words use utility analysis to explain why people demand health. How does the Law of Diminishing Marginal Utility fit into the analysis?

How would you expect the price elasticity of demand for medical care to vary with health status? Give a specific example.

Solution

Answer:

A commodity is demanded because it has some utility or satisfaction associated with it. One good is preferred over another good because it has higher utility over another. Similar argument can be made for healthcare. People demand health because it is a consumable commodity. People derive satisfaction from having a better health. They are happier and efficient if they have a good health. He will be able to command better quality of life and enhancement in living standards by having a healthy lifestyle.

Law of diminishing marginal utility states that additional units of commodity generate lower utility. Because at higher levels of health, an increase in one unit of health will gave less utility and he will be less willing to leave another commodity. The available supply of health has increased so its marginal utility decreases. SUppose a person is fully healthy and does not need any medicine, so for him providing him with one additional unit of health will have lower utility. Thus utility increases at a decreasing rate with respect to health of a person.

price elasticity of demand for medical care emphasizes the responsiveness of health care to the change in its prices. An increase in prices of medical care will not lead to much decrease in demand for health status. So price elasticity of demand is fairly inelastic. A one percent increase in prices of health care will lead to less than one percent decrease in demand of it. But there are exceptions. If the health care has substitutes, for example in hospital outpatient services, elasticity is generally high. Also if the cost of medical treatment is high, a person may have high price elasticity. Further insurance cover has lower price elasticity.