The Demand for Medical Care

THE QUANTITY OF MEDICAL CARE DEMANDED

 

Many people have the misconception that economic theory has little relevance to the demand for medical care because economic factors are not important when an individual needs urgent medical attention. Recall Joe in Topic 1, who awoke one night with a pain in his chest and realized he was having a heart attack. It is highly unlikely that he and his wife considered the price of medical care as Joe was rushed to the hospital.

However, most visits to a physician’s office and the majority of visits to a hospital emergency room are not of a life-threatening nature. Thus, for many medical care transactions, there is sufficient time to make conscious choices, and price often plays an important role in the determination of choices. Results of a survey of various types of health care providers and insurers substantiate the critical role price plays in determining the demand for medical care (Winslow, 1994). According to the survey, price was ranked as more important than patient satisfaction or access to doctors, among other factors, in determining the economic success of health care providers.

 

 

The Demand for Medical Care and the Law of Demand

To derive the demand curve for medical care, we must first establish the relation between the quantity of medical services and utility. Recall from Topic 2 that the stock of health can be treated as a durable good that generates utility and is subject to the law of diminishing marginal utility. As a reminder, note that we continue to ignore the intermediate step between the stock of health, the services it provides, and utility. This means that each incremental improvement in health generates successively smaller additions to total utility. We also know that medical services are an input in the production of health because a person consumes medical care services for the express purpose of maintaining, restoring, or improving health. However, the law of diminishing marginal productivity causes the marginal improvement to health brought about by each additional unit of medical care consumed to decrease.

From this discussion, it follows that medical care indirectly provides utility. Specifically, medical care helps to produce health, which in turn generates utility. Consequently, utility can be specified as a function of the quantity of medical care. Figure 5-1 depicts the relation between the level of medical care consumed and utility. Utility is specified on the vertical axis, and the quantity of medical care (q) is measured on the horizontal axis. The shape of the total utility curve indicates that utility increases at a decreasing rate with respect to medical care, or that medical care services are subject to diminishing marginal utility. Marginal utility decreases because (1) each successive unit of medical care generates a smaller improvement in health than the previous unit (due to the law of diminishing marginal productivity) and (2) each increase in health, in turn, generates a smaller increase in utility (due to the law of diminishing marginal utility).

 

 

The Utility-Maximizing Rule

Given market prices at a point in time, consumers must decide which combination of goods and services, including medical care, to purchase with their fixed incomes. According to microeconomic theory, each consumer chooses the bundle of goods and services that maximizes utility. Without working through the mathematics underlying the process, logic dictates that consumer utility is maximized when the marginal utility gained from the last dollar spent on each product is equal across all goods and services purchased. That is, assuming all prices are known, income is spent over the period in question, and all products are subject to the law of diminishing marginal utility.

The shape of the utility curve illustrates that total utility increases at a decreasing rate with respect to the level of medi­cal care consumed. The curve has a bow shape for two reasons. First, each additional unit of medical care consumed results in a smaller increase in health than the previous unit because of the law of diminishing marginal productivity. Second, each additional improvement in health generates a smaller increase in utility because of the law of diminishing marginal utility.

This condition is known as the utility-maximizing rule, and it basically states that total utility reaches its peak when the consumer receives the maximum “bang for the buck” in terms of marginal utility per dollar of income from each and every good. In mathematical terms, the rule states that utility is maximized when

(5-1)                                        MUq/Pq = MU_Z/P_Z,

where MU_q represents the marginal utility received from the last unit of medical care purchased, q, and MU_z equals the marginal utility derived from the last unit of all other goods, z. The latter good is often referred to as a composite good in economics. To illustrate why the utility-maximizing rule must hold, suppose that

The Law of Demand

The equilibrium condition specified in Equation 5-1 can be used to trace out the demand curve for a particular medical service, such as physician services. For simplicity, assume the prices of all other goods and income remain constant and initially the consumer is purchasing the optimal mix of physician services and all other goods. Now assume the price of physician services increases. In this case, MU_q/P_q is less than MU_z/P_z (where MU_q and P_q represent the marginal utility and price of physician services, respectively). Consequently, the consumer receives more satisfaction per dollar from consuming all other goods. In reaction to the price increase, the consumer purchases fewer units of physician services and more units of all other goods. This reallocation continues until MUq/Pq increases and MUz/Pz decreases and the equilibrium condition of Equation 5-1 is again in force such that the last dollar spent on each good generates an equal amount of utility. Thus, an inverse relation exists between the price and the quantity demanded of physician services.

If the price of physician services continually changes, we can determine a number of points representing the relation between the price and the quantity demanded of physician services. Using this information, we can map out a demand curve like the one depicted in Figure 5-2, where the horizontal axis indicates the amount of physician services consumed (as measured by the number of visits, for example) and the vertical axis equals the price of physician services. The curve is downward sloping and reflects the inverse relation between the price and the quantity demanded of physician services, ceteris paribus. For example, if the price of physician services equals P₀, the consumer is willing and able to purchase q₀. Notice that if the price falls to P₁, the consumer purchases q₁ amount of physician services.

The substitution and income effects associated with a price change offer another theoretical justification of the inverse relationship between price and quantity demanded. Both of these effects predict that a higher price will lead to a smaller quantity demanded and, conversely, a lower price will result in a greater quantity demanded. According to the substitution effect, a decrease in the price of physician services causes the consumer to substitute away from the relatively higher-priced medical goods, such as hospital outpatient services, and purchase more physician services. That is, lower-priced services are substituted for higher-priced ones. As a result, the quantity demanded of physician services increases as price decreases.

According to the income effect, a lower price also increases the real purchasing power of the consumer. Because medical care is assumed to be a normal good (that is, the quantity demanded of medical services increases with income), the quantity demanded of physician services increases with the rise in purchasing power. That also generates an inverse relation between price and quantity demanded because as price falls, real income increases and quantity demanded rises. Taken together, the substitution and income effects indicate that the quantity demanded of physician services decreases as price increases.

In summary, Figure 5-2 captures the inverse relationship between the price the consumer pays for medical care (in this instance, physician services) and the quantity demanded. The curve represents the amount of medical care the consumer is willing and able to purchase at every price. Utility analysis, or the income and substitution effects, can be used to generate this relationship. This inverse relationship is sometimes referred to as the law of demand. It is important to note that the demand for medical care is a derived demand, because it depends on the demand for good health. A visit to a dentist illustrates this point. An individual receives no utility directly from having a cavity filled. Rather, utility is generated from an improvement in dental health.

Of course, other economic and noneconomic variables also influence the demand for health care. Unlike price, which causes a movement along the demand curve, other factors influence the quantity demanded by altering the position of the demand curve. These other economic and noneconomic determinants of demand are the topic of the next section.

 

Other Economic Demand-Side Factors

Income is another economic variable that affects the demand for medical services. Because medical care is generally assumed to be a normal good, any increase in income, which represents an increase in purchasing power, should cause the demand for medical services to rise. Figure 5-3 illustrates what happens to the demand for physician services when income increases. The increase in income causes the demand curve to shift to the right, from d₀ to d₁, because at each price the consumer is willing and able to purchase more physician services. Similarly, for each quantity of medical services, the consumer is willing to pay a higher price. This is attributable to the fact that at least some portion of the increase in income is spent on physician services. Conversely, a decrease in income causes the demand curve to shift to the left. Some goods are referred to as inferior goods. This is because the demand for these goods decreases as income increases. A classic nonmedical example is hamburger. As real income increases, the consumer may prefer to buy more expensive cuts of meat and purchase less hamburger. In the medical sector, hospital outpatient services may be an example of an inferior good. As income increases, the consumer may prefer to visit a private physician to receive individual care rather than outpatient services. As a result, the demand for outpatient services may decrease as income increases. Some researchers have found that tooth extractions represent an inferior dental service.

The demand for a specific type of medical service is also likely to depend on the prices of other goods, particularly other types of medical services. If two or more goods are jointly used for consumption purposes, economists say that they are complements in consumption: Because the goods are consumed together, an increase in the price of one good inversely influences the demand for the other. For example, the demand for eyewear (that is, glasses or contact lenses) and the services of an optometrist are likely to be highly complementary.

Normally, an individual has an eye examination before purchasing eyewear. If these two goods are complements in consumption, the demand for optometric services should increase in response to a drop in the price of eyewear. As a result, the demand curve for optometric services shifts to the right. Another example of a complementary relation exists between obstetric and pediatric services. An increase in the price of pediatric services should inversely influence the demand for obstetric services. If, for example, a woman postpones pregnancy because of the high cost of pediatric services, her demand for obstetric services also falls. The demand curve for obstetric services shifts to the left.

It is also possible for two or more goods to satisfy the same wants or provide the same characteristics. If that is the case, economists say that these goods are substitutes in consumption: The demand for one good is directly related to a change in the price of a substitute good. For example, suppose physician services and hospital outpatient services are substitutes in consumption. As the price of outpatient services increases, the consumer is likely to alter consumption patterns and purchase more physician services because the price of a visit to the doctor is cheaper in relative terms. That causes the demand curve for physician services to shift to the right. Generic and brand-name drugs provide another example of two substitute goods. The demand for brand-name drugs should decrease with a decline in the price of generic drugs. If so, the demand curve for brand-name drugs shifts to the left. Finally, eyeglasses and contact lenses are likely to be substitutes in consumption.

Time costs also influence the quantity demanded of medical services. Time costs include the monetary cost of travel, such as bus fare or gasoline, plus the opportunity cost of time. The opportunity cost of an individual’s time represents the dollar value of the activities the person forgoes when acquiring medical services. For example, if a plumber who earns $50 an hour takes two hours off from work to visit a dentist, the opportunity cost of the time equals $100. The implication is that the opportunity cost of time is directly related to a person’s wage rate. Given time costs, it is not surprising that children and elderly people often fill doctors’ waiting rooms. Time costs can accrue while traveling to and from a medical provider, waiting to see the provider, and experiencing delays in securing an appointment. In other words, travel costs increase the farther an individual has to travel to see a physician, the longer the wait at the doctor’s office, and the longer the delay in getting an appointment. It stands to reason that the demand for medical care falls as time costs increase (that is, as the demand curve shifts to the left).

 

The Relationship between Health Insurance and the Demand for Medical Care

The growth of health insurance coverage is one of the most significant developments in the health care field over the past several decades. It has had a profound influence on the allocation of resources within the medical care market, primarily through its impact on the out-of-pocket prices of health care services. Out-of-pocket payments for health care dropped from almost half of total expenditures in 1960 to approximately one-seventh in 2003. Even more striking, out-of-pocket payments for hospital care fell from 20.7 percent in 1960 to a mere 3.2 percent in 2003. Given that various features are associated with health insurance policies, it is impossible to discuss the economic implications of each one. Here we will focus on three of the more common features of health insurance policies: coinsurance, copayments, and deductibles.

Coinsurance and Copayments. Many health insurance plans, particularly private plans, have a coinsurance component. Under a coinsurance plan, the consumer pays some fixed percentage of the cost of health care and the insurance carrier picks up the other portion. For example, under a plan with a coinsurance rate of 20 percent (a common arrangement), the consumer pays 20 cents out of every dollar spent on health care and the carrier picks up the remaining 80 cents. As you can imagine, an insurance plan like this one has a significant impact on the demand for health care because it effectively lowers the out-ofpocket price of health care by 80 percent.

Let’s begin our discussion of coinsurance coverage by looking at the demand curve for medical care from an alternative perspective. We normally think of the demand curve as revealing the amount of a good that a consumer is willing and able to buy at various prices. However, a demand curve also shows the consumer’s willingness to pay (or marginal benefit) for each unit of a good. The negative slope of the curve indicates that the willingness to pay falls as more of the good is consumed due to the law of diminishing marginal utility.

For example, the demand curve d_WO (WO = without insurance) in Figure 5-4 represents the consumer’s demand or willingness to pay for office visits in the absence of health insurance coverage. This “effective” demand curve reveals that the consumer is willing to pay $50 for the fifth office visit. If $50 is the market price paid by the consumer, she visits the physician five times during the year in the process of maximizing utility because any additional office visits do not yield benefits that compensate for their higher out-of-pocket costs. Notice that the consumer’s willingness to pay for the first four visits, as revealed by the effective demand curve, exceeds the market price of $50. The difference between the willingness to pay and the market price paid is referred to as a customer surplus and, in this example, reflects the net benefits received from visiting the doctor the first four times.

As discussed in Topic 8, market price considers both supply and demand conditions. The demand curves in Figure 5-4 represent the effective and nominal demands of an individual. Individual demands must be horizontally summed to arrive at a market demand and then interacted with supply to determine the market price.

Now suppose the consumer acquires a health insurance plan that requires her to pay a certain fraction, C₀, of the actual price, P. In this case, the insurance coverage drives a wedge between the willingness to pay, or effective demand, and the actual price, or “nominal” demand, for the office visits. Because the utility-maximizing consumer determines the optimal number of times to visit the physician by equating her willingness to pay (or marginal benefit) to the out-of-pocket price (marginal cost), the relationship between the actual and out-of-pocket price can be specified by the following equation:

(5-3)                              Pw = CoP.

Here P_w stands for the consumer’s willingness to pay for the last visit, and C₀ represents the coinsurance amount. If we solve Equation 5-3 for the actual price, we get

(5-4)                              P = Pw/Co.

Because the coinsurance, C₀, is less than 1, it follows that the actual price paid, or nominal demand, for office visits is greater than the out-of-pocket price the consumer pays. For example, if she is willing to pay $50 for five visits to a doctor and the coinsurance is 20 percent of the full price, the actual price equals $250 per visit, or $50/0.2.

The nominal demand curve labeled d_WI (_WI = with insurance) in Figure 5-4 reflects the total price paid for medical services that takes into account the coinsurance paid by the insured. The vertical distance between d_WI and the horizontal axis represents the total price for office visits, which can be broken down into the amount the consumer pays and the amount the insurance carrier pays. The portion of the total price the con­sumer pays as an out-of-pocket payment equals the distance between the horizontal axis and the d_WO demand curve. The remaining distance between the two curves represents the amount the insurance carrier pays. It represents the wedge that coinsurance drives between the consumer’s willingness to pay, or effective demand, and the total price paid, or nominal demand.

It is easy to see from this analysis that a reduction in the coinsurance rate causes the nominal demand curve d_WI to rotate clockwise and pivot off the point where d_WO crosses the horizontal axis. At a zero willingness-to-pay price, insurance has no bearing on quantity demanded because medical care is a free good to the individual. In addition, the nominal demand curve d_WI becomes steeper as the coinsurance, C₀, decreases in value as indicated by Equation 5-4. That makes intuitive sense, because we expect the consumer to become less sensitive to changes in the total price as the coinsurance declines.

In the case where the consumer has full coverage (C₀ = 0), the nominal demand curve d_WI rotates out to its fullest extent and becomes completely vertical. This is shown in Figure 5-5. Because the consumer faces a zero price, she consumes medical care as though it were a free good, when in reality it has a nonzero price. Equation 5-4 can be used to illustrate that point. As C₀ approaches zero, the total price is potentially infinity even when P_w equals zero.

Coinsurance should not be confused with a copayment. A copayment represents a fixed amount paid by the consumer that is independent of the market price or actual costs of medical care. For example, a person may be required to pay $10 for each office visit regardless of the actual fee negotiated by the health insurer with the physician. Like a lower coinsurance rate, a reduced copayment results in a movement down the effective demand curve and typically leads to greater quantity of care demanded. But unlike a change in the coinsurance rate, a change in the copayment does not cause a rotation of the nominal demand because the consumer’s portion of the bill is independent rather than proportional to nominal demand (that is, the actual price paid).

Also unlike coinsurance, a copayment does not automatically change with an adjustment in the costs of providing medical care. For example, suppose, in response to higher production costs, a physician negotiates a higher price with the insurer for each office visit so that the market price increases from $100 to $150. An insured individual who is responsible for paying 20 percent of the cost now faces a $10 increase in his coinsurance from $20 to $30 per office visit. However, an insured individual who is required to pay a copayment of $10 per office visit is unaffected by the higher negotiated price for an office visit (at least until the insurance policy is renegotiated). Thus, compared to a copayment, coinsurance makes consumers more sensitive to the actual market price of medical care.

Deductibles. Many insurance policies have a deductible whereby the consumer must pay out of pocket a fixed amount of health care costs per calendar year before coverage begins. For example, the plan may call for the individual to pay the initial $200 of health care expenses with a limit of $500 per family per year. Once the deductible is met, the insurance carrier pays all or some portion of the remaining medical bills, depending on how the plan is specified. From the insurance carrier’s perspective, the purpose of a deductible is to lower costs. This is accomplished in two ways.

First, the deductible is likely to lower administrative costs because fewer small claims will be filed over the course of a year. Second, the deductible is likely to have a negative impact on the demand for health care. The extent to which this is true, however, is difficult to determine and depends on such factors as the cost of the medical episode, the point in time when the medical care is demanded, and the probability of needing additional medical care for the remainder of the period. To illustrate, assume a new deductible is put in place at the beginning of each calendar year. Once the deductible is met, the consumer has full medical coverage. It is easy to see that the extent to which a deductible influences the demand for medical services for any one medical episode is likely to be inversely related to the cost of the medical services involved. For example, if the consumer faces a potentially large medical bill for an operation, the existence of a deductible is likely to have little impact on demand. This is because, in relative terms, the deductible represents very little money. On the other hand, a deductible may play a crucial role in the decision to purchase medical care if the cost of such care is relatively inexpensive. In this case, the out-of-pocket cost is substantial relative to the total cost, and the consumer may elect not to purchase the medical care or postpone the purchase to a later date.

It is slightly more difficult to understand how the health of the individual, along with the time of the year, influences the impact of a deductible on demand. The best way to explain this is with an example. Consider a normally healthy individual who contracts the flu late in November and has incurred no medical expenses up to this point. Under these circumstances, he may be less inclined to visit the doctor. This is because he will have little opportunity to take advantage of the fact that health care is a free good after he makes his initial visit to the physician and fulfills the deductible. On the other hand, this same individual is much more likely to visit the physician if he catches the flu early in February and his overall health is such that he can expect to visit the physician three or four more times over the remainder of the year. By visiting the doctor and meeting the deductible, he lowers the cost of any future visits to zero for the rest of the year. Therefore, a deductible is likely to have the greatest negative impact on the demand for medical care when the cost of the medical episode is low, the need for care is late in the calendar year, and the probability of needing future care is slight because the person is in good health.

 

Moral Hazard

Before we leave the subject of the impact of insurance on the demand for medical care, we need to introduce the concept of moral hazard. Moral hazard refers to the situation in which consumers alter their behavior when provided with health insurance. For example, health insurance may induce consumers to take fewer precautions to prevent illnesses or to shop very little for the best medical prices. In addition, insured consumers may purchase more medical care than they otherwise would have without insurance coverage. Let’s illustrate this point by referring to Figure 5-4. According to the graph, a consumer without insurance purchases five units of medical services at a price of $50 per unit. If that consumer acquires full medical coverage such that the insurer’s coinsurance rate, C₀, equals zero, the quantity demanded of medical care increases to the point where the demand curve crosses the horizontal axis. At this point, the consumer consumes medical care as though it were a free good because she faces a zero price. Thus, any extension of medical insurance coverage has the potential to increase the consumption of medical care because consumers no longer pay the full price. The availability and extensiveness of health insurance may have a profound effect on medical care expenditures. Topic 6 examines the implications of moral hazard in more detail.

 

Noneconomic Determinants of the Demand for Medical Care

Four general noneconomic factors influence the demand for medical services: tastes and preferences, physical and mental profile, state of health, and quality of care.

Taste and preference factors include personal characteristics such as marital status, education, and lifestyle, which might affect how people value their healthy time (that is, their marginal utility of health), or might lead to a greater preference for certain types of medical services. Marital status is likely to impact the demand for health care in the marketplace primarily through its effect on the production of health care in the home. A married individual is likely to demand less medical care, particularly hospital care, because of the availability of a spouse to care for him at home, such as when recuperating from an illness.

The impact of education on the demand for medical care is difficult to predict. On the one hand, a consumer with additional education may be more willing to seek medical care to slow down the rate of health depreciation because that consumer may have a better understanding of the potential impact of medical care on health. As an example, an individual with a high level of education may be more inclined to visit a dentist for periodic examinations. Thus, we should observe a direct relation between educational attainment and demand.

On the other hand, an individual with a high level of education may make more efficient use of home-produced health care services to slow down the rate of health depreciation and, as a result, demand fewer medical care services. For example, such an individual may be more likely to understand the value of preventive medicine (such as proper diet and exercise). In addition, the individual may be more likely to recognize the early warning signs of illness and be more apt to visit a health care provider when symptoms first occur. As a result, health care problems are addressed early when treatment has a greater probability of success and is less costly. That means that we should observe an inverse relation between the level of education and the demand for medical care, particularly acute care.

Finally, lifestyle variables, such as whether the individual smokes cigarettes or drinks alcohol in excessive amounts, affect health status and consequently the amount of health care demanded. For example, a person may try to compensate for the detrimental health impact of smoking by consuming more health care services. That translates into an increased demand for medical care.

The profile variable considers the impact of such factors as gender, race/ethnicity, and age on the demand for medical services. For example, females generally demand more health care services than males primarily because of childbearing. In addition, certain diseases, such as cardiovascular disease, osteoporosis, immunologic diseases (such as thyroid disease and rheumatoid arthritis), mental disorders, and Alzheimer’s disease, are more prevalent in women than men (Miller, 1994). Age also plays a vital role in determining the demand for medical care. As we stated in Topic 2, as an individual ages, the overall stock of health depreciates more rapidly. To compensate for this loss in health, the demand for medical care is likely to increase with age, at least beyond the middle years (the demand curve shifts to the right). Thus, we should observe a direct relation between age and the demand for medical care.

State of health controls for the fact that sicker people demand more medical services, everything else held constant. As you might expect, health status and the demand for health care are also likely to be directly related to the severity of the illness. For example, a person who is born with a medical problem, such as hemophilia, is likely to have a much higher than average demand for medical care. In economics jargon, an individual who is endowed with less health is likely to demand more medical care in an attempt to augment the overall stock of health. As another example, Fuchs and Frank (2002) find an increased use of medical care, both inpatient and outpatient care, among Medicare recipients living in highly polluted Metropolitan areas of the United States. The relationship holds even after controlling for population, education, income, racial composition, and cigarette use.

Finally, although nebulous and impossible to quantify, the quality of care is also likely to impact the demand for medical care. Because quality cannot be measured directly, it is usually assumed to be positively related to the amount and types of inputs used to produce medical care. Feldstein (1967, pp. 158-62) defines the quality of care as “a catch-all term to denote the general level of amenities to patients as well as additional expenditures on professional staff and equipment.” For example, a consumer may feel that larger hospitals provide better-quality care than smaller ones because they have more specialists on staff along with more sophisticated equipment. Or, that same individual may think that physicians who have graduated from prestigious medical schools provide a higher quality of care than those who have not. It matters little whether the difference in the quality of medical care provided is real or illusory. What matters is that the consumer perceives that differences in quality actually exist.

With regard to the previous example, it is certainly not the case that larger hospitals provide better care for all types of hospital services. However, if the consumer generally feels that larger hospitals provide better services, the demand for medical services at larger hospitals will be higher than at smaller ones. As Feldstein’s definition indicates, quality can also depend on things that have little to do with the actual production of effective medical care. For example, the consumer may prefer a physician who has a pleasant office with a comfortable waiting room along with courteous nurses. Thus, any increase in the quality of care provided is likely to increase that consumer’s demand for medical care regardless of whether it affects the actual production of health care.

Before we move on, we must distinguish between a movement along the demand curve and a shift of the curve. A change in the price of medical services generates a change in the quantity demanded, and this is represented by a movement along the demand curve. If any of the other factors change, such as income or time costs, the demand curve for medical services shifts. This shift is referred to as a change in demand. Thus, a change in the quantity demanded is illustrated by a movement along the demand curve, while a change in demand is illustrated by a shift of the curve.

 

The Market Demand for Medical Care

Up to now, we have been discussing the individual’s demand for medical care services. The market demand for medical care, such as physician services, equals the total demand by all consumers in a given market. In graphical terms, we can construct the market demand curve for medical care services by horizontally summing the individual demand curves. This curve represents the amount of medical services that the entire market is willing and able to purchase at every given price. For example, if the average price of a visit to a doctor is $50 and at this price consumer A is willing to see a physician three times over the course of a year while consumer B is willing to make four visits, the total, or market, demand for physician services is seven visits per year at $50 per visit. The market demand curve is downward sloping for the same reasons the individual demand curves are downward sloping. In addition, the factors that shift the individual demand curves also shift the overall market demand curve, providing the changes take place on a marketwide basis. The market demand curve also shifts if the overall number of consumers in the market increases or decreases. For example, the demand for medical care in a particular community may increase if it experiences an influx of new residents. This causes the market demand curve to shift to the right.

The development of a market demand curve allows us to distinguish between the intensive and extensive margins. The intensive margin refers to how much more or less of a product consumers buy when its price changes. The extensive margin captures how many more or fewer people buy a product when its price changes. Obviously, this is an important distinction to make for a product like medical care. Many medical purchases such as surgeries happen only once for a particular individual. As another example, an individual can have a particular tooth pulled only once. This is also a one-shot purchase that either happens or does not happen. If the price of tooth extraction falls, however, we may still observe a inverse relationship between the price and number of teeth extracted. That is because at the extensive margin, more consumers elect to purchase this onetime form of dental services as price falls. Consequently, quantity demanded may increase with a reduction in price because of changes that occur at the intensive and extensive margins.