All Other Goods
•Increase in Medical Services from the initial
equilibrium Q1 to Q2 is the income effect.
•Movement along the indifference curve U2, which
is from Q2 to Q3 is the substitution effect.
BC1 BC3 BC2
Q1 Q2 Q3 Medical Services
At the initial price of P1 and quantity Q1, consumer and
producer surplus is:
B+C = Initial Consumer Surplus
B D+E = Initial Producer Surplus
A insurance policy that subsidies the use of hospital
services is similar to a shift in the demand curve right.
C I Suppose the subsidy is P2 - P3 per unit of Q.
D F G The effects of this shift is:
B+C+D+F+G = New Consumer Surplus
E+D+C+I = New Producer Surplus
E C+I+H+G+F+D = Cost to Insurance Company
H = Deadweight Loss
Q1 Q2 Quantity
At the initial price of P1 and quantity Q1
consumer surplus is:
A = Initial Consumer Surplus
The Impact of Moral Hazard on Producer
and Consumer Surplus When the Price Is
Reduced to 0:
A+B+C = New Consumer Surplus
B+C+E = Cost to Insurance Company
A E = Deadweight Loss
0 Q1 Q2 Quantity