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II. DEFINITION AND VARIATION OF ELASTICITY MEASURES

The elasticity of demand is a measure of consumer response to a change in the price of a

product, the price of related products, or personal income. In this chapter we describe three

alternative measures of price and income elasticity with respect to demand for health insurance

and health services products. In addition, we describe factors that may contribute to different

magnitudes of elasticities estimated for the same types of products and consumers.

A. ALTERNATIVE MEASURES OF DEMAND ELASTICITY

Several measures of elasticity are important to public policy development and analysis, and

have been estimated (with more or less frequency) in the research literature. Each is described

below.

1.

Own-Price Elasticity

The own-price elasticity of demand is a measure of the responsiveness of demand to a

change in the product’s own price. In general, the own-price elasticity of demand is negative—

that is, a higher price or greater cost sharing reduces the quantity of health insurance or medical

services demanded, all else being equal. The demand for health care is generally estimated to be

price-inelastic (the absolute value is less than one), meaning that consumers do not strongly

reduce the amount of care they use in response to an increase in price. Still, the magnitude of

own-price elasticity estimated in the literature varies.

2.

Cross-Price Elasticity

In addition to considering the product’s own price, consumption decisions also involve

consideration of prices both for available alternatives and for complementary products. The

cross-price elasticity of demand measures how a change in the price of one product affects the

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