The Effect of an Ageing Population ans its Effect on a Nation's Health Care System - Research Paper Example

Economic Tools and Concepts The effect of an ageing population and its effect on a nations health care system Introduction     The economics of ageing puts a particular stress on a nations healthcare system. This is especially true in many developed nations in which life expectancy has been higher than ever before. Since an ageing population is in need of more medical attention, the rising number of retirees (ex: the baby-boomer generations in the USA) put vast amount of stress on the nations health care system. The increasing demand for health services and rising cost of modern medical treatment can be difficult to contain the long-term. However, while debates grow on the evolution of healthcare due to ageing, we must keep in mind that various economic factors can create vastly different results. This essay will examine the effects of an ageing population on a nations healthcare system by using a variety of economic tools such as demand and supply graphs, optimization and elasticity functions.   The changes in demand and supply of healthcare due to ageing   The demand for a nations healthcare services is directly linked to its population. As such, between 1980 to 2007, the population of the US grew by an average of 1.1% per year. Thus, the population grew from around 227 million in 1980 to 302 million in 2007. A simple extrapolation based on current growth trends will put the US population at around 440 million by 2050 (refer to figure 1.1).   It is not simply the size of the population but also its composition that is very important, especially the percentage of the senior population. According to the 2000 census, the population of 65-and-older was estimated to be 35 million in the US. This translates to around 12.7 % of total population, but will rise to almost 20% of the population by 2050. As the population grows older, the healthcare system will face higher demand since senior citizens suffer from more chronic illness and require more medical attention than any other age group (refer to figure 1.3).   Courtesy of the Center for Medicare and Medicaid services   Figure 1.0: The rise in healthcare costs from 1990-2007.   Graph courtesy of Uwe Reinhardt   1.1: Aging as a percentage of the population: As the graph above shows, the population that is 65 years and older will rise from 12.7% in 2000 to 20.3% in 2050.         Courtesy of the US census Bereau     1.2: Composition of US population: As shown above the older segment of the US population is set to increase significantly over the next few decades.           Courtesy of the US Census Bureau     1.3: As the graph above indicates the comparison between the general population (below 65) and the older segment of the population with regards to physical and mental disabilities.     Demand and Supply   The Law of Demand   The Law of demand states that there is an inverse relationship between the amount of a commodity that a person will purchase and the sacrifice a person is willing to make to get it.   In other words, the higher the price (sacrifice) the less people will be willing to purchase it. This is also applies the other way around: the more people are willing to obtain a good or service, the more they are willing to sacrifice or pay. However, changes in the price of a good will result in a change along the demand curve while other factors (such as aging of the population) will push the demand curve to the right.   Demand itself, its determined by various factors such as the price of the product, price of substitutes and alternatives, consumers income, consumer’s tastes, and other individual and environmental factors.     Figure 2 : The figure above depicts the change in demand caused by an aging population. The rise in a nations aging population creates a surge in the demand for healthcare, which in turn pushes the demand curve to the right from point A to point B,    The Law of Supply   The law of supply states that there is a positive relationship between the price of a product and the quantity that producers are willing to supply. In other words, a higher price will induce producers to produce more goods and vice versa.   Supply is also determined by other factors such as the cost of production, number of firms supplying the commodity, level of technology and the producers expectation of future prices. If there is a change in the price of a good, there will be a shift along the supply curve, but other factors will cause the supply curve itself to shift to the left.   With regards to health care, a rise in demand due to aging population is certainly going to push producers to produce more healthcare services such as hospital facilities and treatment centers. However, it is a fact that the rising cost of health care is partly because demand far outstrips the supply of health care and this means that even though the supply of healthcare is rising, there will also be a rise in the price of healthcare. There are also various other factors as to why supply has been relatively slow to respond to demand including increasing operations costs (bureaucracy, regulations, etc.) , government intervention distorting demand and supply (ex: subsidies causing an excess demand), lack of proper competition, barriers to entry, etc.       Figure 3: The figure above depicts the change in the projected supply of healthcare. Accordingly, the supply curve shifts left from point A to point B, and quantity supplied increased from Q1 to Q2.     The effects of increased demand on the equilibrium point: todays situation   The effects of increase demand and relatively lesser increase in the supply of healthcare has resulted in a change in equilibrium in which the price of healthcare continues to increase.     Figure 4: As shown above the equilibrium point is originally at E1, where price is at P0 and Quantity demanded is at QD0. However, due to the increase in demand caused by an aging population and a relatively weak response in supply (due to the factors mentioned above) both the demand and the supply curves shift to the left. However, the supply curve shifts by a lesser degree. The new equilibrium point is at E2 with prices at P1 and Quantity demanded at QD2.     Price of Elasticity of Demand   The relationship guiding the change of demand because of change in price is called the price elasticity of demand (PED). Essentially, PED measures the responsiveness of quantity demanded to a change in price, while holding all other variables constant. If a commodity is highly elastic, then a percentage change in price will cause a greater percentage change in quantity demanded. If a commodity has an in-elastic demand, then a percentage change in price will cause a smaller percentage change in quantity demanded.   The PED is calculated as follows   Ep= Percentage change in Q/ Percentage change in P ; where Q stands for quantity demanded and P stands for Price   Elasticity itself can be measured as follows:   Perfectly elastic: ∞ Elastic: 1 Read More