Lecture 7 - Health Care Supply Flashcards
On the demand curve, what is price equal to?
Marginal benefit
As price falls, more people buy the product, so MB goes down
On the supply curve, what is price equal to?
Marginal cost
As price rises, more firms make the product and they face a higher MC than existing firms
What is the equation for price elasticity of supply?
PES = ((Q1-Q0)-(Q1+Q0))/((P1-P0)-(P1+P0))
Q - quantity
P - price
What does it mean if 0<PES<1
Inelastic
Change in supply is proportionately less than the change in price. Change in price has relatively small effect on quantity supplied.
What does it mean if PES > 1
Elastic
Change in supply is proportionately greater than change in price. Change in price has relatively large effect on the quantity supplied
Why is PED negative while PES is positive?
PED is negative because demand curve has downward slope
PES is positive because supply curve has upward slope
What are the 4 key market features?
- number of consumers and producers
- product differentiation
- barriers to entry/exit
- nature of information
What is the Herfindahl-Hirschman Index (HHI)?
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
What is the equation for teh Herfindahl-Hirschman Index?
∑ni=1 Si2
Add up the square of the share of each firm
What is the market type when HHI is 10,000?
Monopoly
What is the market type when HHI = 5,000?
Duopoly
What is the market type when HHI = 2,500?
Oligopoly or monopolistic competition
What is the market type when HHI = 100
Monopolistic competition or perfect competition
What is the market type when the HHI is 0?
Perfect competition
What are the characteristics of a monopoly?
- Single supplier
- High barriers to entry
- May be no close substitutes
- Firms can decide how much to charge
What are the characteristics of a duopoly?
- 2 sellers
- Barriers to entry
- Differentiated products that are close substitutes
What are the characteristics of an oligoply?
- Small number of sellers
- Barriers to entry
- Differentiated products that are close substitutes
- Firms are very inter-dependent
What are the characteristics of perfect competition?
- 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
What are the characteristics of monopolistic competition?
- Many sellers try to capture the market share by differentiating their products
- Easy to enter the market
- Firms have some influence over price
When is it more likely to have collusion instead of competition?
- There are few firms, well aquainted with each other
- There is a dominant firm
- Firms are prepared to co-operate and share information
- It is difficult for more firms to enter the market
What is the formula for average revenue?
AR = total revenue/quantity
What is the formula for marginal revenue?
MR = (TRq-Tq-1)/(Qq-Qq-1)
What values should be equal for profit maximisation?
MC = MR
At this quantity the extra money earned from selling an additional product equals the additional cost of producing it
What will firms do when MR > MC?
Could make more profit from increasing production
What will firms do when MC > MR?
Could make a loss with every unit sold
What does the shape of the MC curve depend on?
The returns to scale
What does the location of the MR curve depend on?
Location of MR depends on market type
What are the 4 conditions for perfect competition?
- large number of consumers and providers
- homogenous products
- easy to enter and exit the market
- consumers and providers have perfect information
Under perfect competition, what does MR equal?
Under PC MR=P because producers are price takers
When is there market equilibrium for a sector?
When supply matches demand
When is there market equilibrium for a firm?
When MC = MR
What is normal profit and what is the equation?
Normal profit is the minimum level of profit needed for a firm to remain competitive in the sector.
TR - TC = 0
If costs go down, what happens to MC and AC?
They go down
What is abnormal profit?
When you are selling at a higher price than costs
If more firms enter the market, what will happen to the supply curve?
Price in sector will go down so supply curve will shift to the right and savigns are passed on to consumer
What is difference in production under monopoly and perfect competition?
In monopoly less is produced but at a higher price
What is dead weight loss?
The cost to society created by market inefficiency which occurs when supply and demand are out of equilibrium
Is there dead weight loss with perfect competition?
No
What is monopoly profit?
The difference in profit between PC and monopoly
Why is the MR curve under monopoly steeper than the demand curve?
Because to attract new customers into the market you have to reduce price for everyone, including pre-existing customers
What is price equal to when under perfect competition?
Optimal level of output
P = MR
What are 2 benefits of regulating monopoly markets?
- 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.
- The second benefit is that, by removing the monopoly output distortion, cost-reducing investments that were previously unprofitable may now become profitable.
- 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.
What is the benefit of yardstick competition in a monopoly market?
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.
When using yardstick competition you turn a monopoly market into ____.
Using yardstick approach you turn a monopolist market into almost perfect competition (you give them the price)
What is the rule for social efficiency?
MC = D = AR
Yardstick competition makes equilibrium point closer to ____.
MC = MB
