Question

Define own-price elasticity of demand, and explain how it is related to the demand curve. Provide four reasons why the demand for medical services is likely to be inelastic with respect to its price.

Answer 1

Ans. Definition :- It refers to percentage change in quantity demanded because of percentage change in its own price.

For eg:- If percentage in change in quantity demanded is 10 because of 5 percent reduction in its prices,then own elasticity of demand is given by 2 (10/5).

Relation with demand curve:-

It is related to demand curve because it determines the slope of demand curve. Higher the elasticity of demand flatter the demand curve,wheras lower the elasticity of demand steeper the demand curve.

Four reasons why demand for medical services is likely to be inelastic:-

1) Very few substitutes :- when a product has very less substitutes,it gives rigidity to the consumer and they tend to consume goods even at higher prices.

2) Habitual in nature :- Some medical drugs/services are habitual in nature and they require frequent demand for such products,hence makes the elasticity of demand low.

3) Low competition :- This is also one of the determinants which indicates elasticity of demand. In medical services we do not see Perfect competetion which enables the seller to keep some margin over cost. Lower competetion makes the elasticity of demand low.

4) Postponement of demand not possible:- Here the demand needs to be met at very short interval otherwise life threat can be an issue. Because demands need to be met immidiately,this makes inelastic demand for such products.