Grace Franz Assignment 1

Healthcare Economics 10/7/2020

XHAD 6230 500

The following table depicts the weekly demand and supply of office visits at a local children’s clinic staffed by four
physicians.

Price per Quantity Quantity

visit demanded supplied
$20 300 150
 25 275 175
 30 250 200
 35 225 225
 40 200 250
 45 175 275
 50 150 300

 Given this data, answer the following questions:

What are the equilibrium price and quantity of office visits per week?

Equilibrium is the price point at which the quantity of a good or service demanded by all purchasers is the same as the
supply provided by all sellers. This is also known as the market clearing price. As evidenced in the table above at the plot
below, the equilibrium price point is $35 per visit and the quantity is 225 visits per week.

60

50

40
Price

30
Demand
20 Supply

10

0
140 160 180 200 220 240 260 280 300 320
Quantity
 Grace Franz Assignment 1
Healthcare Economics 10/7/2020
XHAD 6230 500

If one of the physicians moves to another city, reducing quantity supplied by 25 percent, what are the price and
quantity at the new equilibrium?

60

50

40
Price

30
Demand
Supply
20 Supply 2

10

0
100 150 200 250 300 350
Quantity

When one physician moves away, it shifts the demand curve up and to the left. The decrease in quantity of visits supplied
will increase the price of each visit. To find the exact new equilibrium quantity demanded and price, one must solve for y
= mx + b (reduced below). A simpler way to get a close estimate is to take the current equilibrium demand and reduce it
by 25%, then take the equilibrium price and increase that by 25%. Using that method, the supply will decrease from 225
to 168.75 (rounded to 169 visits). The price can then increase 25% to bring demand back into equilibrium with
supply, the new equilibrium price will increase from $35 to $43.75 per visit.

y = mx + b
Supply points: (225, 50)/(112.5, 20), Supply slope = m= (50-20)/225-112.5 = 30/112.5
50 = 30/112.5 * 225 +b,
b = 50 – 30/112.5 *225
b = 50 -60
b = -10
supply slope y = 30/112.5 x -10
demand points: (150,50)/9300,20), Demand slope =m =50-20/150-300
m =30/-150
50 = 30/-150 (150) +b
50+30 =b
b = 80
demand slope y = 30/-150(150) + 80
to find equilibrium we need Ys=Yd and Xs=Xd
30/112.5 (Xs) – 10 = 30/-150 (Xs) +80
30/112.5 (Xs) = 30/-150 (Xs) + 90
30/112.5 + 30/150 (Xs) = 90
(.2 + .2667) Xs = 90
(.4667) Xs = 90
Xs = 192.86, Xs = 193 visits
Ys = 30/112.5 (192.86) -10, Ys =$41.43
 Grace Franz Assignment 1
Healthcare Economics 10/7/2020
XHAD 6230 500

Assuming the original four physicians, if a price ceiling is set at $25 per office visit, how many office visits will be
demanded per week? How many will be supplied? Describe the outcome of such a policy.
When a price ceiling is set at $25 per visit, the demand will rise from the point of equilibrium to 275 visits. At this price
point, however, physicians will only supply 175 visits and there will be a shortage of visits available. In the graph below,
you can see “Qs” as the quantity supplied at the $25 mark and “Qd” as the quantity demanded at that price. The blue
shaded area represents the 100-visit shortage that such a price ceiling would create.
60

50

40
Price

30
Demand
20 Supply

10

0
140 160 180 200 220 240 260 280 300 320
Quantity
 Grace Franz Assignment 1
Healthcare Economics 10/7/2020
XHAD 6230 500

What would happen if all patients had insurance where insurers would pay $40 per visit but the patient had a 50%
copayment (they pay half of the fee)?
Like the situation of the price cap in the previous question, if patients only pay $20 per visit the quantity demanded will
increase. However, the difference in this question is that the payer is reimbursing the physician at $40 per visit and thus
the supply will change based on that price. In the graph below, you can see “Qs” as the quantity supplied at the $40 mark
and “Qd” as the quantity demanded at the $20 price. The difference between what is demanded and what is supplied is a
shortage. Since the physicians are receiving more reimbursement than the patient is paying the shortage is not as dramatic
as the previous example. In this example the community will see a 50-visit shortage. Shortages generally cause prices to
rise so providers may ask for more reimbursement when they negotiate the contract with the insurance agencies. This in
turn would lead to an increase in cost to the patient which would then decrease the demand for visits. Another possibility
is that, considering the shortage and potential rise in costs, patients will seek alternative treatments (herbs, acupuncture,
etc.). In fact, our text points out that consumers will get what they demand even if they must resort to bribery, black
markets, etc.

60

50

40
Price

30
Demand
20 Supply

10

0
140 160 180 200 220 240 260 280 300 320
Quantity

In both the price ceiling scenario and the insurance scenario above, it is important to point out the impact that artificial
pricing has on economic optimization. Under normal market conditions consumers will only buy goods until the marginal
benefits are equal to the marginal costs. Why spend more when it isn’t worth it? However, when healthcare is subsidized
the marginal cost is lowered and therefore the level of benefit needed for the patient to keep consuming is also lowered.
This leads to overconsumption which can be detrimental to the patient, healthcare system, and society.