Microeconomic

Analysis
Economics 545
Nataly Bruk

Introduction
Choosing a career path is a matter of passion for some, circumstances for
others, and careful consideration and analysis of the microeconomic climate for
Jenny. A career in medicine is a complex decision due to the large investments
required upfront. Becoming a doctor requires a 4 year bachelors degree, preferably
in the sciences and at a prestigious institution. During college, a science heavy
course load will take up most to all of ones free time. Another consideration is the
cost of tuition for college, books, and housing. It is important to participate in
volunteer activities as well as gain experience in the medical field. Finding time for
extracurricular activities will be near impossible during this time as maintaining an
A average is imperative to medical school admission. It is important to understand
that choosing this path requires a strong commitment and sacrifice of free time for
the next 12-17 years.
Another consideration is testing and preparation course fees. Exams such as
the MCAT, USMLE, and board exams cost on average $1000. Once accepted in to
medical school the next 4 years will consist of constant studying. The cost of
medical school is much higher than most colleges. When medical school is
complete, one must decide what type of medicine they wish to practice and the
location. I will discuss the pros and cons of becoming a doctor and where to
practice. This paper will include an analysis of demand, supply, price elasticity of
supply and recommendations.
Demand Determinants
Although there have been recent efforts to increase the physician workforce,
the maturation of physicians requires a great deal of time and the US will not see
the increase for another 4-8 years. The predicted increase of physicians is 7% in

2008-2018, while the number aging adults (65 and over) is expected to increase by
35% (Case, 2014). The Association of American College predicts that the US will
have a shortage of 45,000 primary care physicians.
The demand for health care is considered to be price inelastic. The price
elasticity estimate for health care is -0.17 (Ringel et al, 2005). Demand for health
care is also income inelastic, with the income elasticity at 0-0.2 (Ringel et al, 2005).
Other determinants of demand for health care include the type of health care. Price
elasticitys are larger in preventative care and prescription drugs. The availability of
close substitutes is increasing. Nurse practitioners, midlevel providers, and
Physicians assistants are gaining more autonomy and are able to provide services.
As the number of substitutes increase, the demand for physicians will decrease, and
the price will also decrease. Preventative care and subspecialties are often seen as
luxury and demand for services is more elastic.
Using the midpoint formula we can calculate the price elasticity of demand.
Hypothetical numbers are used to demonstrate the relationship. If the price of
insurance co-pay increases from $10 to $20 to $30, the number of customers with
the insurance plan would decrease from 100 customers to 80 customers, to 50
customers. (100-50)/(10-30)= 50/-20= -2.5

Demand Curve
120
100
Number of customers

80

Linear (Number of
customers)

60
40
20
0
10

20

30

One of the biggest determinants of demand for health care is the elasticity
demand for health insurance. Health insurance plans vary by co-pays, deductibles,
coverage of services, coverage of prescription drugs, and requirements. An
increase in copay cost, deductible cost, or decrease in services covered will lead to
a decrease in members enrolled in the insurance plan. The decrease in members
will then increase the demand for health care services to be covered by that plan.
The price elasticity demand for health insurance is -1.8 to -0.1 (RIngel et al, 2005).
Vox Day demonstrated how the demand curve looks in response to Obama
care in Figure 1:

Supply Determinants
Physician supply depends on a number of factors. The ability to obtain an
education in the form of a bachelors degree, a doctor of medicine degree, and a
residency program will affect the number of physicians. Barriers to education are
the cost of tuition and location of institutions. There are currently a limited number
of residency positions available and the number of graduating medical students
exceeds the number of residency positions offered. There is an increase in the

supply of medical graduates, but a decrease in the supply of residency positions

which will lead to a decrease in the supply of practicing physicians. If the supply of
physicians increases the price of health care will fall. Another way to increase
supply would be to increase the amount of services provided by physicians.
The estimate of the price elasticity of supply for health care is -0.2 to 0.55
(McRae, Butler 2014). Data and pricing from 1996 are as follows: $39.03 fee for
service, $31.10 8 year mean gross price (McRae, Butler 2014). The price elasticity
of supply over the 8 years is 0.14. Supply Curve Data taken from 1996-2003 are
charted below (McRae, Butler 2014):

Data taken from 2003-2010 of 16 cities in Korea expand on the determinants

of Cost of Production (Han et al. 2013).
Determinants of health expenditures:

Predictions of health expenditures: (A: 65 and older, B: population, C: GDP, D:

Medicare economic index, E: hospital number, F: physician number) (Han et al.
2013).

Fixed costs associated with health care include: machines and equipment (XRay, MRI), office supplies, patient room supplies, furniture, insurance, rent, utilities,
taxes, salary, and miscellaneous expenses. We can estimate total fixed costs per
month to be $7000. Variable costs are costs for medical records, supplies, postage,
additional staff, paperwork, and miscellaneous. Marginal costs are the total cost at
output minus total cost at output -1. This is tells us how much we would save if we
produced one less product.

Supply curve for health care (Creative Commons, 2012):

Loss is minimized when output produced in the short run is equal to marginal
revenue and marginal cost if the price is less than average cost, and greater than
the average variable cost. Profit maximization is when the price is greater than
average total cost. Profit maximization occurs when MR = MC, and a net profit will
be generated.
Short run economic profits for deciding to pursue medicine are going to be in
the red. Unless a person is independently wealthy, or has a family member that can

contribute to the costs, the profits will be none. For the first 8-10 years there will be
no profits, no returns, only costs. Cost of education varies from person to person
and depends on many factors. Initial investment in the form of a scholarship or
trust fund can mitigate effects of costs.
Upon graduation the typical median salary for a primary care physician is
$160K. Costs of attending school will be much higher. Loan repayment plans can
also help to mitigate the costs.
Recommendations
Choosing the path of medicine is dedicating yourself to lifelong learning and
initial massive debt, however, if you are successful the profits will be maximized
after loans are paid off. Its difficult to make a recommendation about choosing this
field based on financial reasons. I believe that there are many ways to be very
successful financially, in a more timely fashion, with less stress and debt. My
recommendation is that if there is no passion for medicine, for serving people,
curing illness, or providing relief, then do not choose medicine.
If a scholarship can be obtained, or there is another option to reduce short
term costs then this can shorten time to maximum profits. Depending on specialty
chosen, loans can be paid off in 5 short years. Another option is to pay 10% of your
income for 10 years working in public service. Internal medicine physicians median
income is 200K per year and Family medicine take home 150K per year. Other
specialties such as Anesthesia 300K and Ob/Gyn 250K have high medical
malpractice premiums to consider.
Unless the number of residency positions increase there will be a high
demand for physicians, low supply of physicians, high supply of medical school
graduates, and low supply of access to health care. Many factors affect the cost of

health care including insurance, physician supply, and complimentary care.

Increasing the number of midlevel provider privileges could decrease the impact of
a high demand curve.

Works Cited
Case, I. (2014). THE DOCTOR SHORTAGE...REAL? (cover story). Benefits Selling,
12(12), 34-38.
Creative Commons (2012): Theory and Applications of Economics (v 1.0), Section
16.1 Supply and Demand in Health Care Markets
Day, Vox. (2009). Doctors Orders: Economics of Obamacare. WND, WND.com,
http://www.wnd.com/2009/07/105088/
Han, K., Cho, M., Chun, K., (2013). Determinants of Health Care Expenditures and
the Contribution of Associated Factors: 16 Cities and Provinces in Korea,
2003-2010. J Prev Med Public Health Nov 2013; 46(6): 300-308
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3859851/
McRae, I., Butler, J.R.G., (2014) Supply and demand in physician markets: a panel
data analysis of GP services in Australia. Int J Health Care Finance Econ 14(3):
269-287
Ringel, J.S., Hosek, S.D., Vollaard, B.A., Mahnovski, S., (2005). The elasticity of
Demand for Health Care: A review of the Literature and Its Application to the
Military Health System. RAND Health. National Defense Research Institute. 115.
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4125822/