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Price Theory
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Question: Over the past several decades, the inflation-adjusted price of healthcare has increased. Based on this information alone, can you infer the source of the higher price—lower supply or higher demand? If not, what additional data would you need to determine whether higher prices are being driven by changes in supply or demand?
READER COMMENTS
steve
Dec 9 2025 at 9:29am
Off the top of my head you would also need to know the changes in the patient population, quantity/quality of services provided, changes in health care providers, changes in insurance, changes in regulations, changes in inputs like drugs and tech.
Steve
John Hall
Dec 9 2025 at 9:50am
If you assume “healthcare” is a single thing, then the price could increase because of lower supply or higher demand, but also you could have higher demand and higher supply but the interaction is such that you end up with higher prices (maybe demand increases more than supply or depends on relative elasticities). Similarly for lower demand and lower supply.
So for the sake of simplicity, assume that one effect is dominant and the other is de minimis.
How can you tell which is dominant? By what happens to quantity.
If quantity increases, then the increase in price is driven by rising demand. If quantity has fallen, then the increase in price is driven by falling supply.
I expect you would find in the data that real healthcare spending has increased. In the US this is definitely true. These suggest that increasing demand is the dominant factor. I also assume it is true regardless of whether you look at the aggregate or on a per capita basis or likely even adjusting for demographics (there are now more older people as a share of population than in the past). Or whether you look at the share of real healthcare spending in real GDP.
Tucker Omberg
Dec 10 2025 at 11:27pm
Total Spending is Price TIMES Quantity, so is insufficient to tell us the cause of a price change. Total Spending could increase as the result of rising demand (Price and Quantity increase) OR as the result of falling supply combined with an inelastic demand schedule (Price rises by a greater magnitude than Quantity falls).
To judge quantity we’d have to look at variables like the number of surgeries performed per capita, prescriptions filled per capita, or even looking at mortality and morbidity for various diseases.
Jon Murphy
Dec 10 2025 at 7:52am
Given there are three ways price rises in a market (demand increases, supply decreases, or some combination of the two), we cannot determine the cause of the price increase from the effect. We’d need more information.
What factors are influencing demand? Demographic shifts, increases wealth of the community, medical tourism, change in preferences, insurance coverage, etc.
What factors are influencing supply? Regulatory burdens, Bamoul cost effects, etc.
Knut P. Heen
Dec 10 2025 at 10:33am
The quality of the service has changed considerably. That violates the ceteris paribus assumption of demand-supply-analysis. Bloodletting is not the same good as some of the treatments that actually works today.
Lynn
Dec 10 2025 at 3:46pm
Since the end user pays for insurance (price) as health costs, it’s easier to move this to the theory of the firm. Health insurance is an oligopoly market structure; the equilibrium quantity is either the population or a large proportion of it. It has grown, but not much as a percentage. Price increases will result from changes in the marginal cost curves of insurance providers (supply), which will drive the price increase. Or, providers of health insurance are regulated as cost-plus, so price increases are from supply.
Matthias
Dec 15 2025 at 6:39pm
I agree with most of the other comments.
One extra caveat: you can supply and demand of healthcare stay exactly the same, but the inflation adjusted price can still change.
Look at the following scenario:
All prices in the economy stay exactly the same, but remote controlled toy cars imported from China double (or half) in price. (And we assume people react by adjusting the quantity demanded so that total expenditure on remote controlled toy cars stays flat.)
The inflation adjusted price of everything else in the economy will change. Even though their nonimal prices haven’t changed at all.
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