Midterm Flashcards
Market Efficiency
( i.e., eliminating anticompetitive elements from an industry)
Rational Behavior
Consumers and producers are assumed to weigh the costs and benefits of different courses of action and to choose the most preferred alternative.
Two tools of economists
Scarcity (Marginal Analysis) and Choice (Supply and Demand Analysis)
Diminishing Marginal Benefits/Utility
these additional (marginal) benefits decline as more units are purchased
Opportunity Cost
When a consumer makes a particular choice, the value they would have received from the next best choice is the opportunity cost of the choice they made
explicit cost
i.e. out-of-pocket cost)
implicit cost
i.e., use of one’s time)
Technical efficiency means:
that the combination of inputs used will produce the maximum quality of medical services
Economical efficiency:
occurs when the decision-makers selects the least costly combination of inputs, each of which is technically efficient.
Factors Affecting Demand
Price Price of Substitute Products Price of Complementary Products Income Tastes and Preferences Population
Consumer surplus
the difference between what a consumer would be willing to pay and what she actually has to pay (i.e., the market price).
Complements
are goods or services that are used together.
Demand curve will shift
either right or to left, An aging population will cause the demand for medical care to shift to the right
The greater the number of people in a community the greater the demand for medical care
the demand curve shifts to the right
Factors Affecting Supply
Price
Input Prices
Technology
Number of Suppliers
A shift in Supply
When Wage increase (input price) shift upward (left)
When Technology increase marginal productivity (MP) , shift to down (right)
Similar to population on demand side, # of suppliers will cause a shift to the right (down)
Market Equilibrium
At the prevailing price, the quantity demanded equals the quantity supplied
Cross Price Elasticity
used to indicate the closeness of substitutes and the effect on complementary services of a change in price
Supply Elasticity
responsiveness of supply to changes in price.
Monopoly Model
When a perfect substitute does not exist for a firm’s product or service, then the firm has a downward sloping demand curve; it has some monopoly power
Externalities
occur when an action undertaken by an individual (or firm) has secondary effects on others that may be favorable or unfavorable
Major Demand side In-Kind Subsidies:
Medicare, Medicaid, CHIP, tax exemption of health insurance, and tax deductibility of medical expenses in excess of 7.5 % of adjusted gross income
Supply side direct subsidies
health manpower education, graduate medical education, hospital construction, provision of medical services through VA, state and local government hospitals
Supply side indirect subsidies
Granting tax-exempt status to non-profit hospitals, state’s assistance in financing hospital bonds
Two basic objectives of government:
1-improve market efficiency
2- redistribute income in a more equitable manner
Demand curves are downward sloping because of
Demand curves are downward sloping due to diminishing marginal benefits. Each additional unit of the good provides you with less utility than the previous unit
Which of the following will not increase the demand for medical services?
New cost-saving technology in MRI machines because technology improvements affect supply and not demand
Suppose the federal government will no longer provide financial support to hospitals (causing some public hospitals to close), but will instead give that money directly to taxpayers in the form of a tax credit on medical expenditures. What will happen to the equilibrium price and the quantity of physician office visits?
In this instance, the removal of government assistance to hospitals will shift the supply curve to the left, but the increase in income via the tax credit will increase the demand curve. This will cause price to increase, but the change in quantity is uncertain. A large increase in demand relative to the change in supply will cause quantity to increase. If supply shifts by a greater amount than demand, then quantity will decrease.
Suppose the government institutes new regulations on physicians requiring physicians to take additional years of training before practicing medicine. What will happen to the wages and quantity of physicians?
The additional regulation causes a barrier to entry. This will increase wages for current and future physicians, but will decrease the supply of physicians
There are two types of stents, coil and mesh, used when performing coronary angioplasty. These two stents are substitutes. If the price of coil stents increases, then
If the price of a substitute increases, then the demand curve for the product shifts to the right.
In a competitive market, firms will continue to produce until marginal cost is equal to
The profit-maximizing production level occurs when marginal revenue equals marginal cost, but when markets are perfectly competitive, marginal revenue is equal to price. Therefore, the
Supply curves are upward sloping because of
The reason the firm’s supply curve is upward sloping is because of the Law of Diminishing Returns. Each additional input yields less product than the previous input. Therefore, it costs more to produce the next unit
A “natural monopoly” is the result of
When a firm has decreasing average cost, it can decrease its price by simply expanding production and keeping other firms out of the market.
The private market cannot eliminate externalities when
One method to internalize an externality is to simply charge (compensate) anyone who benefits (is harmed) by the externality. When these individuals are easy to monitor and are to easy to collect or distribute funds to, these individuals’ transaction costs are low, and the externality can be internalized. On the other hand, when collection or monitoring is costly, then it is better for society to allow the externality to exist
Externalities occurred due to
Externalities occur due to a lack of property rights. As stated on page 11 of Chapters 17, when such external costs and benefits are not incorporated into the private decision-making process, the resultant output level is not optimal.
Which of the following is an example of an externality in the cigarette market?
In the case of firsthand smoke, the original smoker is part of the market. When they make the conscious choice to smoke, they are internalizing both the private benefit and the private harm it imposes on them. On the other hand, secondhand smoke causes harm to individuals who are not part of the market for cigarettes. The other options cause changes within the market, but not externally.
The arguments against price competition in the medical care market is
As stated in the text, opponents of competition believe that when suppliers compete, patients are likely to be harmed; their preference is to substitute regulation and monopolization for competition.
Which of the following is not an example of a demand subsidy?
The Veterans Administration (VA) medical system is an example of a direct supply subsidy where the federal government supplies funds to hospitals, nursing homes, and physicians for the sole purpose to serving military veterans
Fill in the blank: A __________ is a tax where the tax rate _______ with wealth
A regressive tax, by definition, is a tax where the tax rate decreases with wealth.
Which of the following statements is true about the public interest theory?
The public interest theory seeks to redistribute funds to the poor. Such redistribution, if financed by a tax, will introduce distortions into the market, which will lead to less efficiency.
If nurses can perform the same activities as a physician assistant, then these two professions
When one input can replace another input in production, it is a substitute
Which of the following statements is true about the economic theory of regulation
The economic theory of regulation states that politicians move funds toward politically powerful groups, which will allow the politician to remain in power or seek election into a political office.
Fill in the blanks. ____________ seeks to redistribute funds to ____________ and ____________ seeks to __________ market efficiency.
The economic theory of regulation seeks to gain more votes by supporting strong political groups. The public interest theory seeks to internalize externalities and minimize or prevent the formation of monopolies.
A process that determines how many dollars will be returned for dollars invested in a health promotion program is called
A cost-benefit analysis is defined as the DBenefits/ DCost. If we consider cost as the amount invested and benefits are the returns.
Suppose a hospital is currently producing 100 inpatient days per day with 20 physicians and 50 nurses. The hospital receives a grant to provide low-cost care. The grant includes funds to double the size of the nursing staff. After the grant, the hospital produces 150 inpatient days per day. What is the marginal product of nurses?
The change in production is equal to 150 - 100 = 50 additional inpatient days. The size of the nursing staff doubled, indicating 50 additional nurses were added to the staff. Therefore, the marginal product of nurses resulting from the change is 50/50 = 1.
The QALYs (quality adjusted life years) measure of health captures the idea that people may be willing to accept
A QALY captures both the length of life remaining as well as the quality of life remaining. Individuals may have a trade-off between these two items.
To allocate resources efficiently, one should consider
Efficiency is gained by adding resources to the program with the largest marginal product. The payoff of adding an additional input in a program is measured by the programs’ marginal product. The program with the largest marginal product has the largest payoff.
The number one cause of death in 2007 is
The number one cause of death in 2007 is heart disease
Which of the following is the primary reason for the reduction in neonatal mortality between 1970 and 1988?
As stated in the text, the primary reason for the decrease in infant mortality is that the number of high-risk pregnancies was reduced by the legalization of abortion
If wages for licensed practical nurses (LPNs) increase
If the price of the substitute rises, then the demand for the good will increase as consumers will move away from the more expensive substitute.
Suppose the state legislature passes a state mandate on mammography exams. Which of the following will occur?
The demand for mammography exams will increase, forcing the market price upwards. The increase in demand will increase the demand for registered radiologic technologists who perform this service.
A subsidy for home care services will
A subsidy for home care services will increase the demand for home care and thus for home care nurses. It will not affect the supply curve for home care. Rather it will change the quantity supplied.
An increase in the demand for medical schools will
An increase in the demand for medical schools will increase tuition at these institutions, but it will also increase the supply of new physicians. Physicians will become less scarce leading to lower wages. As the price of this input falls, the supply curve for services rendered by physicians shifts to the right, leading to an expansion in services and a decrease in price.
Consider an increase in the demand for dentures. As the supply curve becomes _____ elastic, the change in quantity supplied becomes_______.
More; larger
