Question

Some argue that the price elasticity of demand can be used to determine whether a good or service is a luxury or a necessity. In medical care, a procedure with an elastic demand would be considered optional, or elective, and a procedure with an inelastic demand would be a medical necessity. Should planners use price elasticity of demand as a guide to defining services that are medically necessary? What are the advantages of such a classification scheme? What are the drawbacks?

Answer 1

If a procedure with an elastic demand is considered optional, or elective, and a procedure with an inelastic demand is considered a medical necessity, it can be problematic. This is because it doesn't take peoples' income into account. When the price of an essential medicine increases significantly then poor people who cannot afford it will stop consuming it, and then it will be considered as an elastic good, even though it is a medical necessity.

The advantages of such a scheme would be that if they are able to properly classify then they can charge or tax for medicines differently. For instance if they know that a certain medicine is essential and it is inelastic then even if they increase prices/taxes phenomenally they can still make profit because consumers will continue to purchase. The disadvantage as mentioned before, is that lower income people suffer from these schemes.