Developments in pharmaceutics have profound impacts on the healthcare markets. Coupled with growth in the global economy, higher costs and more competitors, significant changes have been observed in the prices of healthcare goods and services.

Discuss how the aforementioned events would impact the healthcare market.                [25]

Essay Breakdown

Essay Breakdown

Factors

“development in pharmaceutics”, “growth in the global economy”, “higher costs” and “more competitors”

Markets Involved

Basic healthcare and specialised healthcare: we have to recognise that this question requires discussion of submarkets, with different elasticities of demand

Concepts Required

Demand & Supply: Factors, Single and Simultaneous Shifts

Elasticities: Price Elasticity of Demand, Income Elasticity of Demand 

 

Introduction
The healthcare market can be split into specific types of healthcare, such as basic healthcare e.g. consulting a General Practitioner for common ailments or basic health screening and specialised healthcare e.g. cosmetic surgeries and fixing braces. The changes may affect the different sub-markets differently. Basic healthcare is a necessity and is less pricey, thus demand would be price inelastic. Specialised healthcare can be quite costly and thus demand would be price elastic (large proportion of income).

Demand refers to the degree to which a consumer is willing and able to purchase a specific good or service, ceteris paribus. Supply refers to the ability and willingness of a producer to sell goods and services at various price levels, ceteris paribus.

In this essay, we will first discuss how each event (we can identify four) will individually impact the healthcare market using demand and supply analysis, before doing a synthesized analysis.

 

Impacts on the Healthcare market:

1.    Developments in pharmaceutics

Ø  Technological advancements may result in lower costs due to new techniques in manufacturing. Lower Cost of Production èHigher Supply èLower Prices

·      Demand for specialised healthcare is price elastic èMore than proportionate increase in quantity demanded

·      Demand for basic healthcare is price inelastic èLess than proportionate increase in quantity demanded 

Ø  Technological advancements may result in better quality output

Ø  Drugs may have increased effectiveness èChanges in taste & preferences èHigher Demand

 

2.    Rising incomes

Income Elasticity of Demand: Measure of responsiveness in the quantity demanded of a good to the change in the income of the people demanding the good, ceteris paribus.

Ø  Rise in incomes èHigher Demand for both types of healthcare

·       Demand for specialised healthcare is income elastic èMore than proportionate increase in demand

·       Demand for basic healthcare is income inelastic èLess than proportionate increase in demand 

 

3.     Higher costs of production

Price Elasticity of Demand: Measure of responsiveness in the quantity demanded for a commodity because of a change in the price of the same commodity, ceteris paribus.

1.     Higher costs of production perhaps due to higher costs of factors of production e.g. land, labour and capital

·      Lower Supply èHigher Prices

                                               i.     Demand for specialised healthcare is price elastic

·      More than proportionate decrease in quantity demanded

                                              ii.     Demand for basic healthcare is price inelastic

·      Less than proportionate decrease in quantity demanded

4.    Increasing number of competitors

1.     More competitors èHigher Supply èLower Prices

                                               i.     Demand for specialised healthcare is price elastic 

·      More than proportionate increase in quantity demanded

                                              ii.     Demand for basic healthcare is price inelastic

·      Less than proportionate increase in quantity demanded 

For basic healthcare

1.     Increase in Demand + Fall in Supply

·      The improvements in technology and rising incomes both leads to an increase in demand.

·      It is likely that the decrease in supply due to higher cost of production outweighs the increase in supply due to increasing number of competitors, as it is a known fact the medical inflation has significantly increased over the years.

·      With both an increase in demand, and a fall in supply, we would expect that prices have increased. 

·      Output would be indeterminate unless we make an assumption on whether the increase in demand would have been greater than the fall in supply, which we would likely expect so because over the years, incomes have significantly increased and people were likely to have been able to better afford basic healthcare even with the higher costs.

For specialised healthcare

1.     Increase in Demand + Fall in Supply

·      The improvements in technology and rising incomes both leads to an increase in demand.

·      It is likely that the decrease in supply due to higher cost of production outweighs the increase in supply due to increasing number of competitors, if we consider that medical inflation, especially for private hospitals has significantly increased over the years.

·      With both an increase in demand, and a fall in supply, we would expect that prices have increased. 

·      Output would be indeterminate unless we make an assumption on whether the fall in supply would have been greater than the increase in demand, which we could justify by looking at the high costs of specialised healthcare given the use of specialised equipment and medical specialists which may be in shortage.

 

Conclusion

It depends on the extent of the shifts in demand and supply.

 

Comments

This question requires the student to realise that the healthcare market is a diverse one, comprising many different types of goods and services. It is important to be able to organise effectively, the different markets for healthcare, and to strategically name the correct markets to discuss separately. Failure to define what ‘healthcare market’ means in your answer could significantly affect your ability to answer the question. In this question, we would want to categorise healthcare markets into sub-categories, one where demand is both price and income elastic, one where demand may be both price and income inelastic. That would give us more scope for the essay to discuss. (RWA)I have chosen to discuss healthcare market in terms of basic healthcare and specialised healthcare, but there are other ways to do such catergorisation, e.g. ‘primary’ healthcare providers vs ‘specialised’ healthcare providers.

 

Notice that we have impacts on both supply and demand contradictory to each other, i.e. the higher cost of production leads to a fall in supply while increasing number of competitors leading to an increase in supply. How do we then decide what is the net impact? Your conclusion to this essay will generally depend on which of the above events you consider having a more significant impact on the healthcare market. You can look at the real world and take into consideration in which direction, prices and output for specific types of healthcare has changed and then make an assessment which changes led to such an outcome.