Question

Compared with Canada, Germany, and the U.K., the U.S. ranks first in the stock of medical technologies such as magnetic resonance imaging (MRI), radiation therapy, and cardiac catheterization. Typically, technological advancement is thought to reduce costs and thus leading to lower prices in most markets. However, in U.S. health care markets, technological improvements are cited as one of the reasons for price increases. Briefly explain this seemingly contradictory phenomena using supply and demand analysis.

Answer 1

While technological advancement has led to lower costs, thereby increasing supply of healthcare services (and shifting supply curve rightward) which is supposed to decrease price of healthcare, there is a simultaneous increase in demand for healthcare caused by advanced technological stock in healthcare, caused by an increase in demand, shifting the demand curve rightward, increasing price. If the rightward shift in demand curve is higher in magnitude than the rightward shift in supply curve, the net effect is an increase in price of healthcare, which explains the rising healthcare price.

In following graph, price & quantity of healthcare are measured vertically & horizontally respectively. D0 & S0 are initial demand & supply curves intersecting at point A with equilibrium price P0 & quantity Q0. As supply rises, supply curve shifts right to S1 and as demand rises at the same time, demand curve shifts right to D1, intersecting S1 at point B with higher price P1 and higher quantity Q1.