Explain using a diagram why when people have medical insurance the PED for medical treatment is likely to be very low whilst the YED is likely to be high

The price elasticity of demand, which measures the sensitivity of demand when price changes, for medical treatment is often low when people have medical insurance since the insurance company will cover most of the cost of the treatment anyway so it makes little difference to the economic agent if the price of the treatment changes since the money they pay (their insurance rate) remains static. Furthermore, medical treatment is a necessity, so even if the economic agent is required to cover a significant proportion of the cost then they will undoubtedly do so since the alternative is severe bodily harm or potentially even death. As the attached diagram demonstrates, a significant hike in prices from P* to P1 results in only a very minor reduction in quantity demanded from Q* to Q1. This is due to the aforementioned reasons - if the insurance provider is covering the cost then it makes little to no difference to the economic agent who may experience a slight increase in his insurance premium but will not have to cover the majority of the price hike. If the economic agent, for whatever reason, does have to bear the main proportion of the price increase he will almost certainly pay it because medical treatment is a necessity and there is little alternative. The YED, on the other hand, will be high for medical treatment since the economic agent will always want the best possible medical insurance and treatment. This means that if there is a more advanced, effective and expensive treatment that is not covered by the insurance plans then those that can afford the superior treatment will pay for it as medical treatment is also a normal good. When your income increases the cost of the medical treatment becomes a smaller proportion of your income and therefore is relatively cheaper. This means that the consumer is much more likely to pay for it since it is a smaller part of his income he is therefore more able to afford it leading to a high YED.

Answered by Timothy W. Economics tutor

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