Why is medical care so expensive according to the economic forces of supply and demand today?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

There can be a number of reasons for this:

1. Prices can go up without demand going down very much (inelastic demand) because medical care is, more than many things, something that you can't do without or put off.

2. And this may be the biggest reason there is very little understanding on the part of the consumer as to how much the medical care is costing.  That's because it's paid by the insurance companies rather than by us out of our own pockets.  If we knew how much everything cost and could directly feel the cost when we used it, we'd probably use less and thereby drive prices down.

So between those two things, the demand curve for medical care is relatively vertical which means that the demand is inelastic.  It's stuff we need and we don't really understand how much it costs.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

If we try to explain the high cost of medical expenses on the basis of forces of demand and supply only, there are two main factors contributing to it. First is the inelastic nature of demand for medical treatment and care. When a person is need of medical assistance, particularly in cases of serious or life threatening situations, the patients are are willing to pay any price within their means. If need arises a person will cut down many other expenses, take loans, and may be sell off some assets to pay for essential treatment. Because of this the providers of medical services are able to increase their charges without the fear of reducing their total demand for medical service.

Second reason for high cost of medical care is relatively inelastic supply. It takes a long time for people to complete the study of medicine and become qualified medical practitioners. In addition, the cost of education for becoming a medical practitioner is very high. Thus not many people are willing to spend that much time and money for becoming medical practitioners. In addition, there is a long lead time for making additional supply of medical practitioners after people realize the high earning potential for them.

The cost of medicines is also high because of monopolistic and market conditions existing in pharmaceutical business. Modern medical treatment depends heavily on new drugs discovered through very expensive research that takes a long time to develop and prove each new medicines. The companies that develop these medicines are then granted patent rights for extended periods. Because of this they have no competition for those specific drugs and they are able to charge very high prices, which the patients are forced to pay because of their inelastic demand.

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