Week 8 Flashcards
(33 cards)
Quantity supplied:
The amount of goods or services a supplier or market is willing to supply at any one price during a specified time; a change in quantity supplied refers to a movement along a given supply curve in response to a change in price.
Supply
A supply curve. The quantity supplied at each price.
Supply curve
(1) For a single firm, the quantity the firm is willing to supply of a service at alternative prices of the commodity. (2) For the market, the relationship between the quantity that all firms are willing to supply and alternative prices of the service.
Supply function
(1) For a single provider, a quantitative relationship between the quantity the supplier is willing to supply and a series of variables that influence the supplier’s behavior, such as price, technology, case mix, quality, and input prices. (2) For a market, the quantitative relationship between the quantity that all suppliers in the market are willing to supply and a series of variables that influence all of the suppliers’ behavior, including price, technology, case mix, quality, input prices, and the number of suppliers in the market.
define and identify the dependent variable in supply analysis—the quantity of the service supplied.
○ There are two levels of supply analysis—that for which the supply unit is the single firm, and that for which the supply unit is made up of all firms in the market.
○ The analysis of market supply is based on analyses of individual suppliers.
○ The product of the health care provider is health care.
○ A health firm supplies a single product, such as a doctor’s examination, a doctor’s visit, a hospitalization, and so on.
Each product is assumed to be homogeneous; that is, all products are the same.
identify the price received by a firm, the marginal revenue, and the market conditions that affect the price received.
○ A price-taking firm is one that will take the price given—the price taken is beyond the control of the firm.
Hence, for a price-taking firm, the price of each unit is given. The marginal revenue is the additional revenue taken in by the firm for each additional unit sold. Since what the firm receives in revenue from selling one more unit is the price, which is a constant, the marginal revenue is equal to the price, and it is also a constant. This statement is true only if the firm is a price taker.
AVERAGE VARIABLE COST (AVC)
§ The unit variable cost for a specific volume of output; total variable cost divided by quantity of output.
MARGINAL COST (MC)
§ The change in cost resulting from a change in output by one unit. Because fixed costs do not change with output, marginal cost is related only to variable cost.
MARGINAL REVENUE (MR)
§ The additional revenue that a firm obtains from selling one more unit of a service.
PRICE
§ An amount of money paid or received per unit of a service or commodity.
PRICE TAKER
§ A supplier that has no influence over the price of the goods or services it sells; the supplier can alter its rate of production and sales without significantly impacting the market price of its product.
PROFIT
§ Total revenue minus total cost. Accounting profit is defined as total revenue for a period’s sales minus costs matched to those sales. Economic profit is total revenue minus economic costs.
identify the assumptions that apply to the supply model of a price-taking firm.
○ The basic assumptions of the supply model are the revenue assumption, the cost assumption, and the behavioral assumption.
○ The revenue assumption is that price received is given (a constant). This assumption can be expressed either in total terms (total revenue) or in marginal terms (marginal revenue). Both are shown in Figure 6-1 on page 143 of your textbook.
○ The cost assumption relates to the cost conditions. These conditions are shown in Table 6-1 and in Figure 6-1 (pages 142 and 143 of the textbook) in total terms, and in terms of average and marginal cost. The basic assumption is that marginal costs will eventually rise, and that average variable costs will show a U-shaped graph. Thus, although the marginal costs are increasing, for some ranges of output they may still be below the AVC. Because it rises continually, assume MC will eventually be above AVC. Note that there can be both fixed and variable costs.
The behavioral assumption (also called the objective function) is that the firm maximizes profits, defined as TR − TC. Without this behavioral assumption, you could not tell which quantity a firm will select as its point of supply.
predict the supply relationship between the quantity supplied and price for an individual firm when
P < AVC, and when
When the price is below the minimum point on the AVC (see Figure 6-2, page 145 of the textbook), the firm will not supply any output at all. Variable costs are avoidable costs. The firm can do better (lose less) by not operating at all and avoiding these variable costs. Note that we reach this conclusion because of the behavioral assumption that the firm seeks to maximize TR − TC. Minimizing losses is the same thing as maximizing profits; it is in effect, minimizing negative profits.
predict the supply relationship between the quantity supplied and price for an individual firm when
P >= AVC.
When the price is equal to or above AVC the firm will supply some output, because if P > AVC, it will be at least covering its variable (avoidable) costs and more. For these points, the profit-maximizing quantity is where the price equals the marginal cost.
predict the effect of changes in the following conditions on the supply curve of the individual firm:
cost-shifting variables, and
§ Shifts in the cost curve can occur because of changes in
□ input prices,
□ the quality of care, and
case mix and case severity.
predict the effect of changes in the following conditions on the supply curve of the individual firm:
nonpatient revenues.
§ Any change that causes a shift in a firm’s cost curve will also cause a change in its supply curve. For example, an increase in input prices will shift the marginal cost (and therefore, the supply curve) to the left. This situation is interpreted as a reduction in supply.
Furthermore, when a firm expands—builds a bigger plant or an additional plant—the cost curve will move to the right, and thus, the supply curve shifts to the right.
identify the assumptions of market supply.
The market supply curve is made up of the sum of the quantity supplied by each firm at each price. Therefore, the number of firms is a factor in the market supply curve. Thus, in developing a model of market supply, economists must add another assumption to those discussed previously—the number of firms in the market is given. This number can increase, and if it does, the market supply shifts to the right.
predict the effect of the following conditions on market supply:
○ alternative prices, and
changes in cost-shifting variables.
§ Just as increased prices will lead to a higher quantity supplied for each individual supplier, they will also lead to an increased quantity supplied for the market. When the price increases, all suppliers will increase their quantity supplied, and therefore, the quantity supplied in the market at each price will also increase.
§ As you know, the cost curve itself will shift in response to changes in input prices, case mix and severity of cases, or product quality. Hence, these same variables will affect the supply curve as well.
For example, an increase in input prices will shift the individual cost curves, and therefore, the individual supply curves, to the left (upward). The market supply curve will similarly shift inward to the left, since it is derived from individual supply curves. When the supply curve is shifted to the left, a lower quantity will be supplied at any given price.
fee for service,
§ According to this basis, the physician receives a fee for every service performed, often in accordance with a given fee schedule. Thus, the physician might receive $95 for a complete physical exam, $700 for a tonsillectomy, and so on. Note that the physician can perform more than one service during a single visit.
Under a fee-for-service payment system, providers will receive more revenue (have a positive MR) when they supply more services, more visits, or more patients. An increase in any of these units will result in more services, and hence, more revenues.
fee per visit,
§ Under this form of payment, the physician would receive a fixed fee for the entire visit, regardless of how many services were provided. This payment mechanism allows for different types of visits, so if a visit were complicated, the physician might bill for a higher level of service.
Under a fee-per-visit payment system, providers do not obtain any additional revenue from providing more services. They only obtain a positive MR from supplying more visits, or from having more patients (who yield more visits).
salary, and
§ Under this basis of payment, the physician receives a given salary for an entire period, no matter how many patients are seen, how many visits are made, or how many services are provided.
Under a salary system, there is no additional revenue from any services, visits, or patients.
fee per patient (capitation).
§ According to this basis, the physician receives a set fee for all specified care provided to a patient during a specified period of time. For example, in Canada, a Health Services Organization (HSO) receives a certain amount of money to provide all ambulatory (non-inpatient) care for a patient during a specific time period. In the United States, a Health Maintenance Organization (HMO) receives a yearly fee to provide all care (inpatient and ambulatory) to a person for the year.
§ Under a fee-per-patient payment system, providers obtain no additional revenue from services or visits; however, serving more patients yields a positive MR.
Physician output
can be broken down into components that include the number of services per visit, the number of visits per patient, and the number of patients treated. Services include specific tests, examinations, and individual procedures (e.g., a wart removal). A visit is counted each time the patient comes to see the doctor. The number of individual patients is the number of patients who are in some way attached to the physician.
