Supply and Demand Elasticities of Physician Services: Disequilibrium Analysis

Abstract

Numerous empirical works have examined the demand for and supply of physician services during the past 15 years. Almost all simultaneous equation models have used the assumption of an equilibrium condition in the physician services market. The assumption of an equilibrium market for physician services may not be realistic, at least not in the short term, because the cost of physician services is insufficiently flexible or because of the induced demand on the part of physicians. Different market assumptions will result in different model formulations and model estimations, and with different empirical implications of the estimated results.

The paper has used the US aggregate time-series data, 1950 to 1980, to estimate the demand and supply relationship of physician services, similar to the model specified in the Martin Feldstein article, ¹ under a disequilibrium physician services market assumption. The maximum likelihood method is used for the empirical estimation. Contrary to Feldstein's earlier findings, the price elasticity of the demand for physicians is statistically significant with expected signs under a disequilibrium condition. The elasticity of supply of physician services is also, as expected, positive and statistically significant. Economic and policy implications are discussed based on these findings. This paper should fill empirically the gap that has been noted by previous researchers on the demand for physician services.