Explain the concept of a price elasticity of demand.

1) Explain the concept of a price elasticity of demand. What does it mean to be highly elastic? Inelastic? What does an elasticity less than -1 (or greater than 1) indicate? What about greater than -1 (or less than 1)

2) Healthcare markets are unique in that most products are inelastic. Why is this? Also, what might an example of an elastic product/service be within healthcare?

3) Calculate a price elasticity using the arc method (using averages) we used in class:

Elasticity = %∆Q / %∆P

Price: $45, New Price: $47. Quantity: 1000, New Quantity: 900

What does this # signify? Is this good elastic or inelastic?

4) Illustrate the effect of elasticity on total revenue(TR) by working through this example:

(Hint: TR= P x Q, so you need to figure out new quantity first, THEN New TR)

What conclusions can you draw?

Chapter 9:

• Suppose you have been tasked by your manager to forecast estimated revenues for your general medical practice for the next 5 years. What data, information might you use in creating your forecast? What degree of confidence would you have in predicting next year? 5 years? How might you convince your manager and/or the physician to buy into your predictions?

2) In the absence of hard data, one might rely on projections based on expertise and opinion. Name an instance when this might be an acceptable method of forecasting.