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35 Cards in this Set
- Front
- Back
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define perfect competition (5)
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1. profit maximization
2. homogenous product 3. multiple producers and consumers - everyone is a pricetaker 4. free entry and exit 5. u shaped cost curves |
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define asymmetry of information (3)
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1. one party in exchange has more information regarding consumption or production attributes than the other party -->
2. trading advantage 3. give a health care example: a. physicians in health care b. consumer in insurance |
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define moral hazard (4)
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1. third party payment environment, eg ins sector
2. ex post 3. hidden action on behalf of consumer/producer --> true reimbursement not returned 4. health care example: a. supplier induced demand |
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law of diminishing returns to factors of production
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1. assoc c SR
2. fixed factor + increasing variable factor: initial marginal increase in production, but will eventually fall |
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why is demand curve downward sloping?
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1. ceteris paribus - holding all other factors, including income, constant
2. as price decreases, more consumers will switch expenditures and purchase more of the commodity |
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why is supply curve upward sloping?
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1. ceteris paribus - holding all other factors constant
2. as price increases, producers will be able to cover higher marginal costs of production and therefore produce more |
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define consumers surplus
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1. CS - area under demand curve bounded by the market price
2. represents the difference between consumers' willingness to pay and the actual price paid 3. monetarized measure of welfare gain to consumers |
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define producers surplus
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1. area above the supply curve bounded by market price
2. represents the difference between producers' willingness to supply various levels of commodity at various levels of marginal cost and the actual price recived 3. monetarized measure of welfare gain to producers |
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relationship between total utility and marginal utility
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1. total utility = total amount of utility acquired by consumers for diff levels of consumption
2. marginal utility = increase/decrease in total utility acquired by consuming an additional unit of commodity 3. therefore, marginal utility is the rate of change in total utility at different points of consumption |
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preconditions for efficient market allocations: demand side
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DEMAND side failures:
1. well established property rights for trading to take place 2. ranked, consistent preferences, rational behav 3. full information 4. "more is not better?) 5. many consumers - price tarkers |
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preconditions for efficient market allocations of resources: DEMAND side
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SUPPLY side failures:
1. technology well known and established 2. factor prices known 3. no natural monopoly - many producers, no barriers to entry 4. market prices known 5. no externalties 6. no public goods 7. perfect information, especially with risk and uncertainty |
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market failures in health care
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1. information assymetry:
a. producer has more info than consumer b. uncertainty and complexcity increases informational assymmetry, greater specialization greater monopoly c. little specification of preferences and demand curve -> agency relationship --> supplier induced demand 2. production process not well specified - even for agent 3. market prices != f(x) a. true opportunity costs b. true demands 4. monopoly power - barriers to entry 5. third party payment - supplier induced demand - moral hazard 6. externalities - ppl care about others health care |
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agency relationship in health care
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1. assymetry of info by consumer/pt
a. info re: health status (dg) b. info re: avail rxs (rx) c. info re: efficacy of rxs (prog) 2. rely on producer/MD to specify their preferences and their demands - particularly b/c healthcare is not an experience good 3. supplier-induced demand - physician is producer and agent on behalf of consumer to define consumption levels 4. producer holds monopoly power a. acquisition of info b. barriers to entry 5. without effective demand, only constraint on monopoly = a. recourse to law b. self-regulation via medical ethics 6. agent may be perfect or imperfect a. inadequate info i. medical knowledge ii. knowledge of pt's circumstances iii. knowledge of pt's indiv preferences b. exploit info asymmetry to maximize their own utility c. eg supplier induced demand = pts encouraged to consume health care of little or no benefit on the recommendation of healthcare providers who then receive a fee (inefficient resources allocation) |
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Can the agency relationship ever be "perfect"?
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1. production process characterized by stochastic outcomes
a. same inputs -> diff outcomes b. cannot observe agent's effort 2. efficient quantity of health care a. perfect agent to pt (private efficiency): would deliver quantity of healthcare to marginal benefit = 0 (third-party payer system without copayment) b. perfect agent to allocate resources (social efficiency): would deliver quantity of health care to marginal benefit = marginal cost c. physician's utility may not exclusively maximize patients' interests: i. MD income ii. hospital surplus |
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What incentive mechanisms exist to ensure that the quantity of healthcare is efficient?
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1. if MD utility f(x) from patients' interests + other stuff system of incentives could be devised to produce efficient quantity of health care
2. socially efficient level is MC = MB 3. retrospective payment - MD would ignore MC and treat until MB = 0 4. prospective payment (full or partial) + MD appropriately trades off resource costs with pt benefits - produce health care quantity MC = MB 5. HOWEVER, if quality of care is introduced, AND, it is a multidimensional issue, than this incentive system may not work |
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define price elasticity of demand
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1. measure of responsiveness of quantity demanded to change in price of same good
2. price elasticity = abs value of (% change in quantity demanded)/(% change in price) 3. elastic: price elasticity > 1 4. inelastic: price elasticity < 1 |
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define difference between avg total cost and marginal cost
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1. avg total cost
a. = total cost per unit of output b. TC/q produced 2. marginal cost a. cost of producing an extra unit of output b. rate of change of TC/output increased/decreased by one unit |
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marginal rate of substitution
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1. rate at which one commodity can be substituted for another without change in total utility
2. marginal rate of substitution is given by the slope of a consumer's indiff curve |
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indiv's demand curve demonstrates
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quantity of commodity which the consumer would be willing to purchase at given price
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what does a shift in the demand curve signify
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1. change in something other than the price of the commodity has change leading to increase or decrease in demand
2. eg consumer tastes or income |
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preconditions for efficient market allocations of resources: DEMAND side
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SUPPLY side failures:
1. technology well known and established 2. factor prices known 3. no natural monopoly - many producers, no barriers to entry 4. market prices known 5. no externalties 6. no public goods 7. perfect information, especially with risk and uncertainty |
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market failures in health care
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1. information assymetry:
a. producer has more info than consumer b. uncertainty and complexcity increases informational assymmetry, greater specialization greater monopoly c. little specification of preferences and demand curve -> agency relationship --> supplier induced demand 2. production process not well specified - even for agent 3. market prices != f(x) a. true opportunity costs b. true demands 4. monopoly power - barriers to entry 5. third party payment - supplier induced demand - moral hazard 6. externalities - ppl care about others health care |
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agency relationship in health care
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1. inadequate info by consumer/pt to specify dg, rx, prog
2. rely on producer/MD to specify their preferences and their demands - particularly b/c healthcare is not an experience good 3. supplier-induced demand - physician is producer and agent on behalf of consumer to define consumption levels 4. producer holds monopoly power a. acquisition of info b. barriers to entry 5. without effective demand, only constraint on monopoly = a. recourse to law b. self-regulation via medical ethics |
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Can the agency relationship ever be "perfect"?
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1. production process characterized by stochastic outcomes
a. same inputs -> diff outcomes b. cannot observe agent's effort 2. efficient quantity of health care a. perfect agent to pt (private efficiency): would deliver quantity of healthcare to marginal benefit = 0 (third-party payer system without copayment) b. perfect agent to allocate resources (social efficiency): would deliver quantity of health care to marginal benefit = marginal cost c. physician's utility may not exclusively maximize patients' interests: i. MD income ii. hospital surplus |
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What incentive mechanisms exist to ensure that the quantity of healthcare is efficient?
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1. if MD utility f(x) from patients' interests + other stuff system of incentives could be devised to produce efficient quantity of health care
2. socially efficient level is MC = MB 3. retrospective payment - MD would ignore MC and treat until MB = 0 4. prospective payment (full or partial) + MD appropriately trades off resource costs with pt benefits - produce health care quantity MC = MB 5. HOWEVER, if quality of care is introduced, AND, it is a multidimensional issue, than this incentive system may not work |
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define price elasticity of demand
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1. measure of responsiveness of quantity demanded to change in price of same good
2. price elasticity = abs value of (% change in quantity demanded)/(% change in price) 3. elastic: price elasticity > 1 4. inelastic: price elasticity < 1 |
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define difference between avg total cost and marginal cost
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1. avg total cost
a. = total cost per unit of output b. TC/q produced 2. marginal cost a. cost of producing an extra unit of output b. rate of change of TC/output increased/decreased by one unit |
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marginal rate of substitution
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1. rate at which one commodity can be substituted for another without change in total utility
2. marginal rate of substitution is given by the slope of a consumer's indiff curve |
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indiv's demand curve demonstrates
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quantity of commodity which the consumer would be willing to purchase at given price
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what does a shift in the demand curve signify
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1. change in something other than the price of the commodity has change leading to increase or decrease in demand
2. eg consumer tastes or income |
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what does a supply curve show?
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1. demonstrates the quantity of a commodity which is being offered for sale at each price
2. can be constructed for indiv supplier or for industry as a whole |
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what is an externality?
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1. external cost or benefit
2. impact arising from an economic transaction which is experienced by parties not directly involved in the transaction |
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is perfect competition feasible in health care sector?
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1. define perfect competition
a. many buyers and sellers - price takers b. homogenous good c. perfect info d. no barriers to entry or exit e. profit maximization 2. perfectly competitive equilibrium discussed with graph 3. Market failures in health care setting: define, and effect on health care would be considered a. uncertainty over timing and financing of health care expenditures b. imperfect knowledge (dg, rx, prog) c. moral hazard (supplier induced demand - no financial impediment to curtail over consumption) d. monopoly (barrier to entry into medical profession, increasing returns of specilization) e. not-profit maximizing objectives (not-cost-minimising behav) |
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decribe failures in providing private health care efficiently
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1. insurance markets and health care: uncertainty re: timing and magnitude of health care expenditures
2. actuarial model Pr = p*C premium = (probability)(compensation) 3. failures a. adverse selection - bad risks do not declare true risk and drive good risks from market as premiums are increased to cover insurer's losses under such circumstances b. consumer moral hazard - consumers have hidden action of over consumption as financial burden carried by insurer c. producer moral hazard - agents over-consume as they make resource decisions but carry no financial risk d. probability of illness not independent |
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using examples, explain how health care resources out to be allocated under conditions of scarcity
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1. market failure in the health care sector
a. uncertainty -> demand for ins b. failure of ins market to provide efficient funding (moral hazard, adverse selection) c. difficulty in specifying production and cost relationships d. economic evaluation in health care |
