Discuss likely reasons why the prices of treatments in private sector hospitals are increasing

Edexcel AS Economics Paper 1 June 2019 Extract

Discuss likely reasons why the prices of treatments in private sector hospitals are increasing. Draw a supply and demand diagram to support your answer. (15 marks)

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The price of any good or service in a free market would increase if demand increases or if supply decreases.

Paragraph 1

1. One possible reason for the increase in price of private sector treatments could be a decrease in quality of NHS.
2. Figure 1 shows that the gap is increasing between the government spending required to meet forecast demand, compared to government spending on the NHS.
3. NHS and private sector treatment are substitute goods.
4. A decrease in the quality of NHS treatment would lead to an increase in the demand for private sector treatment.
5. As demand shifts to the right, this leads to an increase in equilibrium price.
6. Extract B mentions that 'significant increases in the prices of treatment in private hospitals'.

Evaluation

1. If price elasticity of supply of private treatments is low, an increase in demand for private treatments would lead to an even larger increase in the price.
2. One factor that could make supply of private treatment price inelastic could be high barriers to entry.
3. For example, it requires high qualifications to qualify as a doctor, and it may require high startup costs to setup a practice.

Paragraph 2

1. Another reason for an increase in the price of private treatment could be a change in trends.
2. We know from behavioural economics that people are influenced by other people's behaviour.
3. So, as it becomes more trendy and popular for those on high incomes to take up private healthcare, this might encourage even more people to do the same.
4. This leads to an increase in demand, which leads to an increase in prices.
5. Extract B Line 20 mentions that the proportion of people taking up private health insurance has increased to 10.6%, which shows its popularity.

Evaluation

1. However, there could be other more important reasons which makes the price of private healthcare go up too.
2. For example, if there was an increase in costs of production, that would cause a left shift in the supply of private treatment, which would also lead to an increase in price.
3. Extract B line 28 mentions high management and administrative costs.

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