Why Total Expenditure on Healthcare Rises — Demand and Supply Analysis
Answer
Total expenditure (TE) on healthcare is the product of price and quantity exchanged, . The two factors raise TE through opposite sides of the market — an ageing population raising demand, a worker shortage reducing supply — and both push total expenditure up, so together they cause a sharp rise.
Demand-side factor — an ageing population. Demand is the willingness and ability of consumers to buy a good at various prices. An ageing population raises the average age of consumers, and the prevalence of health conditions rises with age, so the willingness to pay for healthcare rises. Demand for healthcare increases, shifting the demand curve right.
As demand shifts right, both price and quantity exchanged rise unambiguously — from P₁ to P₂ and Q₁ to Q₂ — so total expenditure rises from P₁Q₁ to P₂Q₂.
Supply-side factor — a shortage of healthcare workers. Supply is the willingness and ability of producers to provide a good at various prices. A shortage of healthcare workers bids up their wages, raising the unit cost of production and reducing the supply of healthcare, shifting the supply curve left. The effect on total expenditure depends on the price elasticity of demand (PED). Healthcare is a necessity that lacks close substitutes — especially for an ageing population — so its demand is price-inelastic. With inelastic demand, a leftward shift of supply raises price more than proportionately to the fall in quantity, so total expenditure rises.
As supply shifts left, price rises from P₁ to P₂ while quantity exchanged falls less than proportionately from Q₁ to Q₂, so total expenditure rises from P₁Q₁ to P₂Q₂.
Conclusion. Rising demand and falling supply both raise total expenditure on healthcare — the demand increase raising both price and quantity, the supply fall raising price more than proportionately given inelastic demand. Acting together they reinforce one another, producing a sharp rise in total expenditure.