Use the concept of supply and demand to explain why an increase in Medicare subsidies can lead to an increase in health care spending by the government.

 

Answer:

Supply and Demand In Medicare Subsidies:

In supply and demand, the price can be high because the demand is high. The standard approach to demand is based on the idea that the individual will consume goods or services up to marginal valuation from more unit equal to price.

• Medicare have significant magnet power. It does not mean that we can get no insights from supply and demand reasoning.
• But, it is technical to to compare the price of Medicare across countries because we have to consider differences in market power as well.
• A bigger problem is that some medicare suppliers such as hospitals are either govt. controlled or not for profit institutions.
• The standard economic approach presumes that firm firm seek to make as much profit as possible but govt or not for profit hospitals may not have profit maximization as their goal.
• In addition, medicare prices are not prices determined by supply and demand. Again the govt has significant influence on prices.
• Even they are not changed by the govt., the prices determined by the bargaining between drug suppliers and hospitals rather than the supply and demand.
• If people need medicare facilities then their demand likely to be very elastic.
• In elastic demand is not a problem for competitive market , it only means that the equilibrium price is very high.
• If we couple demand with consumer who have a lack of information, in this case the supplier of market becomes powerful and then the matter becomes more complicated.