HCM 402- Section 1 Flashcards
Law of Demand
States that if all else is equal (ceteris paribus), as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. These is a negative or inverse relationship between the price and the quantity demanded (downward slope of the demand curve). The lower the price the greater the quantity demanded. The law of demand is consistent with common sense. People typically buy more of a product at a low price than at a high price. If the price changes, causing a change in the quantity demanded, the demand curve does not shift. It simply moves up or down the original demand curve placement.
Law of Supply
reflects a positive or direct relationship that prevails between price and quantity supplied. As price rises, the quantity supplied rises; as price falls, the quantity of supplied falls.
Market equilibrium
the equilibrium price (market- clearing price) is the price where quantity demanded equals quantity supplied. At equilibrium there is neither a shortage not a surplus, the market is cleared and everyone is satisfied (buyers and sellers)
Factors that affect supply and demand
consumers willingness to buy, number of consumers in market, expectations of future prices, income, quality changes, etc. The supply of a good or service is positively related to the price paid for that service.
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.
- Opportunity cost includes both explicit (i.e. out-of-pocket cost) or implicit (i.e., use of one’s time)
- Given a scarcity of resources, including time, the real cost of making a choice includes the opportunity cost of that decision too.
Define Substitute
goods used in the place of another good. When the price increase leads to an increase in demand for another service, these two are substitutes.
Define Compliment
Goods used in conjunction with another good or to enhance another. When the price of a service increases and it leads to a decrease in demand for another service, these two services are complements.
Define Inferior Goods
A good for which all else equal an increase in income leads to a decrease in quantity demanded. An increase in income leads to a decrease in consumption of that good or service.
Product A raises the price of their product by 4% and sales decline by 4%. Sales of product B also decreases by 3%. Are products A and B complements or substitutes?
A) Complements
B) Perfect Substitutes
C) Substitutes, but imperfect (3% vs 4% decline in sales)
D) Imperfect complements
A) Complements
What happens to inferior goods as incomes rise and price remains constant? A) Demand falls B) Supply falls C) Incomes fall D) Prices fall
A) Demand Falls
Define “elasticity”
the percentage in one variable associated with percent change in another
Market elasticity is estimated to be -0.2. My organization enjoys a 10% share of the market. What is my firm (organizational) elasticity? A) -0.02 B) -0.2 C) -2.0 D) -20.0
C) -2.0
If I increase the price of my product ten percent (10%) and sales decrease by five percent (5%), the product is: A) Elastic, e=-0,05 B) Inelastic, e=-0.05 C) Elastic, e=-2.0 D) Inelastic, e=-2.0
B) Inelastic, e= -0.05
Know how supply, demand and elasticity behave in the short-run and long-run.
- In the short run demand is inelastic. Such as if a price on an item increases in the short run a consumer might be willing to continue purchasing the good.
- In the long run demand is more elastic. In the long run the previously aforementioned price change you would then begin looking at other options are the price remained increased.
- In the short run supply is completely inelastic
- In the long run supply is more elastic
Define scarcity
Means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) prevent us from doing and having all that we might like. When resources are limited because of scarcity, economic decisions must be made to allocate resources efficiently. Scarcity requires a choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied.
Define choice
When choosing between options one must make judgments about the quality of each option’s attributes.
Define marginal analysis
(optimization techniques) understand the allocation process used by consumers when selecting among various goods and services and also to be able to predict changes in consumer allocation. This tool underlies all optimization problems. Optimization techniques (basis of) specifies the appropriate criteria to be used when allocating scarce resources so as to minimize cost of producing a given output of similarly maximize output subject to a budget constraint
Define Supply and Demand Analysis
(second economic tool) (predicting new equilibrium situations) is necessary for predicting new equilibrium situations. For example, predicting the effect of that service. Supply and demand analysis makes it possible to understand the reasons for the rapid increases in medical care prices and expenditures
Define Diminishing returns (also called diminishing marginal returns)
the decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant
Know the “law of diminishing returns” (also law of diminishing marginal returns or law of increasing relative cost)
states that in all productive process, adding more of one factor of production, while holding all others constant (“ceteris paribus”), will at some point yield lower per-unit returns
What does “ceteris paribus” mean?
adding more of one factor of production, while holding all others constant
Know cost benefit analysis
The cost of a treatment is compared to its expected monetary benefits
Know cost effectiveness analysis
determining which programs/or inputs are least costly for achieving a given objective.
Know cost utility analysis
the expected benefits are measured by the amount of utility gained, such as the number of quality adjusted life years gained
T or F: Cost benefit analysis is a form of utilitarianism.
True
What is the meaning of Quality Adjusted Life Year (QALY)?
the time spent in a health state (for a particular disease with specific symptom severity) multiplied by the unity score of the state
Know moral hazard
a situation where the individual alters their behavior after they acquired insurance. Since insurance lowers the
Know preferred selection
an insured with less risk of loss and claims than the normal applicant
Know experience rating
the insurance premium is the same to all the insured, regardless of their claims experience or risk group.
Know community rating
the insurance premium is the same to all of the insure, regardless of their claims experience or risk group.
Know underwriting
the process of assessing the risks associated with an insurance policy and setting the premium accordingly
Know Capitation
A risk sharing arrangement in which the provider group receives a predetermined fixed payment per member per month (PMPM) in return for providing all of the contracted service.
Know Fee-for-service
a method of payment for medical care services in which payment is made for each unit of service provided.
Know Cost-based
a method of paying hospitals for actual costs incurred by patients. Those costs must conform to explicit principles defined by third-party payers.
Know diagnosis related group (DRG)
a method of reimbursement established under Medicare to pay hospital based on fixed price per admission, according to diagnostic related groups
Know the principle-agent problem
occurs when one person or entity (the agent) is able to make decisions that impact, or on behalf of, another person or entity; the principal. The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal. The agent-principal relationship is a useful analytic tool in political science and economics, but may also apply to other areas.
Know the “physician (supplier) induced demand and target outcome”
hypothesis supplier induced demand (SID) may occur when asymmetry of information exists between supplier and consumer. The supplier can use superior information to encourage an individual to demand a greater quantity of the good or service they supply than the Pareto efficient level, should asymmetric information not exist. The result of this is a welfare loss
What is “target income hypothesis”?
the target income hypothesis suggests that a physician is motivated to maintain a certain level of desired income (the target) and if their actual income falls below this level, they will then modify their behavior to restore their income back up to the target. Behavior modifications may include alteration in the physicians recommendations to patients as though the extent or appropriateness of diagnostic treatment modalities in order to produce additional income to meet the target.
Economics of Scale
Large firms that have a cost advantage; the advantage of producing more of a good in order to decrease the cost.
Economics of Scope
multiproduct firms that have a cost advantage from producing a range of products (more cost efficient to produce products together than on their own)
When large companies have lower cost because they spread fixed cost over more product (one unique product): A) Economies of scale B) Economies of scope C) Variable cost D) Economic cost
A) Economies of scale
Know the effects of “fee for service” reimbursement in motivating physicians
Rewards providers who provide a large a large volume of services per client. All other payment systems encourage providers to avoid clients with complicated, expensive problems. (or at least encourage them to prefer clients with simple, inexpensive problems.)
Fee for service payment schemes incentivize physicians to which of following?
A) Reduce the number of days a patient stays in the hospital
B) Perform only those diagnostic tests that are absolutely necessary
C) Redesign inefficient processes and practices
D) None of the above
D) None of the above
Which of these mechanisms is not used by insurance companies to contain costs? A) Co-payments and deductibles B) Closed provider networks C) Incentive to physicians D) Fee-for-service reimbursements
D) Fee-for-service reimbursements
In order for diversification to be useful in managing risk, potential payoffs must be: A) Negatively correlated B) Unrelated C) Either A or B D) Positively correlated
A) Negatively correlated
To maximize profits an organization should expand when: A) MR>MC B) MC>MR C) MR>P D) P>MR
A) MR>MC
Marginal revenue greater than marginal cost
We discussed conditions that may contribute to market failure. The condition whereby consumers are willing, -but unable- to make market transactions is what? A) Imperfect information B) Incomplete market C) Public good D) None of these
B) Incomplete market
What are two data would I need to calculate the best price for a product line? A) Average cost and average total cost B) Marginal cost and Marginal revenue C) Marginal revenue and Price elasticity D) Marginal cost and elasticity
D) Marginal cost and elasticity
