Ch 7 & 8, 17 Flashcards
(41 cards)
Define– Allocative efficiency.
sometimes used interchangeable with pareto efficiency
A situation in which the factors of production have been allocated so as to reflect what people demand (i.e. demand matches supply). Social welfare is maximized as MB = MC in all markets and there can be no substitution between markets to increase welfare beyond its current level.
Define– Market equilibrium.
A situation where the price in a given market is such that the quantity demanded is equal to the quantity supplied.
When all participants are satisfied.
Define– Pareto efficiency.
A situation in which there is no way of making any person better off without making someone else worse off (a point on the production possibilities frontier).
Define– Perfect competition.
A market in which there are many suppliers, each selling an identical product and many buyers who are completely informed about the price of each supplier’s product, and there are no restrictions on entry into the market.
Define– Price taker.
A supplier that cannot influence the price of the good or service they supply.
Define– perfectly competitive market
a market in which there is no intervention or regulation by the state, except to enforce private contracts and the ownership of property
or “free market”
Define– technical efficiency
sometimes used interchangeable with operational efficiency
A technically efficient position is achieved when the maximum possible improvement in outcome is obtained from a set of resource inputs
Define– Productive efficiency [economic efficiency]
refers to the maximisation of health outcome for a given cost, or the minimisation of cost for a given outcome.
what are the conditions for a perfectly competitive market to operate efficiently?
producers selling the same product (homogeneity)
• many sellers and buyers;
• no restrictions on potential sellers entering the market;
• buyers and sellers well informed about prices
What are the advantages of markets in the allocation of resources?
1 Automatic. In theory at least, markets automatically tend towards a situation of equilibrium where the output produced is exactly equal to the output used.
2 Allocatively efficient. Given a few specific requirements, markets will produce an output that is allocatively efficient – that is, each unit of output is produced when the additional benefit it brings exceeds its cost.
3 Responsive to change. The market is dynamic: it is a ‘powerful and efficient information system’. Changes in people’s preferences are quickly passed on to and acted on by producers. Likewise, changes in the availability of and cost of resources are reflected in prices. Cheaper substitute resources are quickly opted for instead
define– Adverse selection.
Adverse selection. When a party enters into an agreement in which they can use their own private information to the disadvantage of another party.
In the case of insurance, if someone thinks they are a low risk then they are less likely to take up insurance than someone who believes themselves to be a high risk.This will mean that only high-risk people will pool their risks and low-risk people will not.This is known as adverse selection. Of the informed group (individuals who know their own health risk), only those who will benefit most from an agreement will enter the agree- ment, to the detriment of the uninformed person (the insurer)
define– Asymmetry of information.
Asymmetry of information. A market situation where all participants do not have access to the same level of information.
define– Deadweight loss.
Deadweight loss. The loss in allocative efficiency occurring when the loss of consumer surplus outweighs the gain in producer surplus.
define– Externality.
Externality. The cost or benefit arising from an individual’s production or consumption decision which indirectly affects the well-being of others.
define– Market failure.
Market failure. A situation in which the market does not result in an efficient allo- cation of resources.
define– Monopoly power.
Monopoly power. The ability of a monopoly to raise price by restricting output.
define– Moral hazard.
Moral hazard. A situation in which one of the parties to an agreement has an incentive, after the agreement is made, to act in a manner that brings additional benefits to themselves at the expense of the other party.
define– Natural monopoly.
Natural monopoly. A situation where one firm can meet market demand at a lower average cost than two or more firms could meet that demand.
define– Public good.
Public good. A good or service that can be consumed simultaneously by everyone (non rival) and from which no one can be excluded (non-excludable).
define– Social cost.
Social cost. The total costs associated with an activity including both private costs and those incurred by society as a whole.
define– Supplier-induced demand.
Supplier-induced demand. The demand that exists beyond what would have been asked by consumers if they had been perfectly informed about their health problems and the various treatments available.
define– Transaction costs.
Transaction costs. Costs of engaging in trade – i.e. the costs arising from finding someone with whom to do business, of reaching an agreement and of ensuring the terms of the agreement are fulfilled.
what are some market failures in the healthcare market?
monopoly, externalities, public goods and asymmetry of information.
what conditions can result in a monopoly (single supplier)?
- no close substitutes (emergency CS)
- barriers to entry (licensing boards, limits doctors, makes salaries higher)
- few providers (lack of hospitals in rural areas)
