Economic Principles Flashcards
What is the fundamental problem of economics?
How to allocate resources to satisfy human wants, acknowledging that resources are scarce, resources have alternative uses, and the relative important of resources varies by person
Describe the production function
A positive relationship between health and health care with diminishing marginal returns on health from increasing health care costs
What can cause a pivot of the production function?
Exogenous shocks (Ex. New vaccine)
What can move you up or down the production function curve?
Increases in the quantity of an input
What is the 1st Welfare Theorem of Economics?
If a competitive equilibrium exists and if the prices have incorporated all relevant costs and benefits, the equilibrium is Pareto optimal
Or in English: no allocation of resources will make everyone better off without making someone worse off
What is the 2nd Welfare Theorem of Economics?
Policies can reallocate purchasing power from the best off to the worst off so that a socially desired competitive equilibrium is reached (usually via taxes and subsidies)
What are the two margins of redistribution for welfare?
Extensive margin (simply getting coverage) and intensive margin (getting more converse once you have coverage)
Why is linking health care to health outcomes so difficult?
- self selection is rampant
- many studies dont have randomization
What is a market?
Buyer and sellers of a given product, service, or info can interact and exchange
Why is it difficult to just slap the label that healthcare should be as much as people are willing to pay?
Patients lack info and the ability to judge underlying health, so their takes on price may not be great
When do you move along the supply curve?
When price of a good or a quantity of the good rises
When do you move down the demand curve?
When the price of a good rises
What does Pareto optimal mean?
Better in every possible way (waste minimized and economy is efficient)
What is a fee-for-service?
Each visit/treatment is reimbursed separately
What is pay-for-performance?
Providers are rewarded or penalized based on whether they met pre-determined benchmarks
What are bundled payments?
Providers receive a lump sum per episode
What is capitation?
Providers receive a lump sum per person and agree to coordinate care and meet pre-determined benchmarks for a specified period of time
What are some economic inefficiencies in health care?
- Medical waste and low-value care
- Employer-paid insurance premiums are tax free
- Patients pay less than the full price
- Medicare and Medicaid reimbursement is too low, subsidized by private insurance
- barriers to entry (only sometimes inefficient)
What are market failures?
When equilibrium price and quantity are suboptimal
When do market failures occur?
When the supply and demand curves haven’t incorporate relevant info (aka externalities not taken into account)
What are supply shifters?
- input prices: land, capital, labor, taxes & regulations
- technology
- expectations: financial, economic, political
- number of sellers: restricted by barriers to entry
IPTENOS - I Put Ten in my Nose
What does perfect competition assume?
- large number of buyers and sellers
- perfect knowledge
- free entry and exit
- homogenous products
- profit maximization
What does perfect competition look like on $ and Q graphs for the market vs the firm?
The Market: Usual Supply Demand graph
The firm: flat horizontal line for marginal returns and a positive linear line for marginal costs that intersect
What are demand shifters?
- income
- price of related goods
- tastes
- expectations
- number of buyers: coverage expansions, aging
IRGTENOB - I really get no bitches
What is the demand curve derived from?
Optimal consumption decisions from buyers seeking to maximize utility
What are determinants of the price elasticity of demand?
- the number of substitutes
- whether the good is a necessity vs luxury
- how you define the market
- time horizon
What does price elasticity measure?
Responsiveness of quantity to a change in price (greater than 1 is elastic, less than 1 is inelastic)
What are types of market failures?
- asymmetric information
- free riders and the tragedy of the commons
- discrimination
- crony capitalism
- externalities
What is the tragedy of the commons?
Depletion and overuse of a shared resource when individuals act in their own self interest
What is the free rider problem?
Benefitting from a public good without paying for it
What is crony capitalism?
Businesses profit from close ties to the government, going against Free enterprise
What is an externality?
Behaviors by individuals that impose costs or create benefits for others
What is a negative externality?
An external cost that results in an over-provision of goods
What is a positive externality?
External benefit that results in an under-provision of goods
What is an example of a negative externality in health care?
Supplier-induced demand and moral hazard cause more health care utilization -> cost spread to everyone in risk pool -> higher premiums
What is a negative supply side externality?
An external cost that results in an over provision of goods
What is a positive supply side externality?
An external benefit that isn’t accounted for before and leads to an under-provision of goods
What is the new supply curved labeled as after taking into account a supply side externality?
Social cost (private + external cost)
What is a demand-side externality?
External benefit that leads to an under-provision of goods
What is a negative demand-side externality?
An external cost isn’t accounted before and there is an over-provision of goods
What is the new demand curve labeled as for a demand-side externality?
Social value (private value + external benefit/cost)
What kind of market failure is caused by the free rider problem?
Under provision of goods
What kind of market failure does tragedy of the commons cause?
Overuse
