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HP420 > Lecture 7 - Health Care Supply > Flashcards

Lecture 7 - Health Care Supply Flashcards

1
Q

On the demand curve, what is price equal to?

A

Marginal benefit

As price falls, more people buy the product, so MB goes down

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2
Q

On the supply curve, what is price equal to?

A

Marginal cost

As price rises, more firms make the product and they face a higher MC than existing firms

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3
Q

What is the equation for price elasticity of supply?

A

PES = ((Q1-Q0)-(Q1+Q0))/((P1-P0)-(P1+P0))

Q - quantity
P - price

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4
Q

What does it mean if 0<PES<1

A

Inelastic

Change in supply is proportionately less than the change in price. Change in price has relatively small effect on quantity supplied.

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5
Q

What does it mean if PES > 1

A

Elastic

Change in supply is proportionately greater than change in price. Change in price has relatively large effect on the quantity supplied

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6
Q

Why is PED negative while PES is positive?

A

PED is negative because demand curve has downward slope

PES is positive because supply curve has upward slope

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7
Q

What are the 4 key market features?

A
  1. number of consumers and producers
  2. product differentiation
  3. barriers to entry/exit
  4. nature of information
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8
Q

What is the Herfindahl-Hirschman Index (HHI)?

A

It measures the concentration of firms in a market. Has values from 0-10,000

0 = low concentration = highly competition
10,000 = complete concentration = no competition

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9
Q

What is the equation for teh Herfindahl-Hirschman Index?

A

∑ni=1 Si2

Add up the square of the share of each firm

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10
Q

What is the market type when HHI is 10,000?

A

Monopoly

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11
Q

What is the market type when HHI = 5,000?

A

Duopoly

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12
Q

What is the market type when HHI = 2,500?

A

Oligopoly or monopolistic competition

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13
Q

What is the market type when HHI = 100

A

Monopolistic competition or perfect competition

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14
Q

What is the market type when the HHI is 0?

A

Perfect competition

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15
Q

What are the characteristics of a monopoly?

A
  • Single supplier
  • High barriers to entry
  • May be no close substitutes
  • Firms can decide how much to charge
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16
Q

What are the characteristics of a duopoly?

A
  • 2 sellers
  • Barriers to entry
  • Differentiated products that are close substitutes
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17
Q

What are the characteristics of an oligoply?

A
  • Small number of sellers
  • Barriers to entry
  • Differentiated products that are close substitutes
  • Firms are very inter-dependent
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18
Q

What are the characteristics of perfect competition?

A
  • Very large number of sellers
  • Easy to enter the market
  • Homogenous products
  • Perfect information (all consumers and producers have all knowledge on market, utility, cost)
  • Firms have no influence over price
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19
Q

What are the characteristics of monopolistic competition?

A
  • Many sellers try to capture the market share by differentiating their products
  • Easy to enter the market
  • Firms have some influence over price
20
Q

When is it more likely to have collusion instead of competition?

A
  1. There are few firms, well aquainted with each other
  2. There is a dominant firm
  3. Firms are prepared to co-operate and share information
  4. It is difficult for more firms to enter the market
21
Q

What is the formula for average revenue?

A

AR = total revenue/quantity

22
Q

What is the formula for marginal revenue?

A

MR = (TRq-Tq-1)/(Qq-Qq-1)

23
Q

What values should be equal for profit maximisation?

A

MC = MR

At this quantity the extra money earned from selling an additional product equals the additional cost of producing it

24
Q

What will firms do when MR > MC?

A

Could make more profit from increasing production

25
Q

What will firms do when MC > MR?

A

Could make a loss with every unit sold

26
Q

What does the shape of the MC curve depend on?

A

The returns to scale

27
Q

What does the location of the MR curve depend on?

A

Location of MR depends on market type

28
Q

What are the 4 conditions for perfect competition?

A
  1. large number of consumers and providers
  2. homogenous products
  3. easy to enter and exit the market
  4. consumers and providers have perfect information
29
Q

Under perfect competition, what does MR equal?

A

Under PC MR=P because producers are price takers

30
Q

When is there market equilibrium for a sector?

A

When supply matches demand

31
Q

When is there market equilibrium for a firm?

A

When MC = MR

32
Q

What is normal profit and what is the equation?

A

Normal profit is the minimum level of profit needed for a firm to remain competitive in the sector.

TR - TC = 0

33
Q

If costs go down, what happens to MC and AC?

A

They go down

34
Q

What is abnormal profit?

A

When you are selling at a higher price than costs

35
Q

If more firms enter the market, what will happen to the supply curve?

A

Price in sector will go down so supply curve will shift to the right and savigns are passed on to consumer

36
Q

What is difference in production under monopoly and perfect competition?

A

In monopoly less is produced but at a higher price

37
Q

What is dead weight loss?

A

The cost to society created by market inefficiency which occurs when supply and demand are out of equilibrium

38
Q

Is there dead weight loss with perfect competition?

A

No

39
Q

What is monopoly profit?

A

The difference in profit between PC and monopoly

40
Q

Why is the MR curve under monopoly steeper than the demand curve?

A

Because to attract new customers into the market you have to reduce price for everyone, including pre-existing customers

41
Q

What is price equal to when under perfect competition?

Optimal level of output

A

P = MR

42
Q

What are 2 benefits of regulating monopoly markets?

A
  1. The first benefit is that regulation can get rid of the monopoly output distortion, by eliminating the monopolist’s incentive to restrict output in order to be able to charge a higher price.
  2. The second benefit is that, by removing the monopoly output distortion, cost-reducing investments that were previously unprofitable may now become profitable.
  3. The use of yardstick competition generates a third benefit from price regulation via prospective reimbursement: namely that it can generate competition between regional monopolists via the ‘yardstick’ established by the reimbursed price.
43
Q

What is the benefit of yardstick competition in a monopoly market?

A

The use of yardstick competition generates a third benefit from price regulation via prospective reimbursement: namely that it can generate competition between regional monopolists via the ‘yardstick’ established by the reimbursed price.

44
Q

When using yardstick competition you turn a monopoly market into ____.

A

Using yardstick approach you turn a monopolist market into almost perfect competition (you give them the price)

45
Q

What is the rule for social efficiency?

A

MC = D = AR

46
Q

Yardstick competition makes equilibrium point closer to ____.

A

MC = MB

HP420 (10 decks)

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