Markets Flashcards
Explain market equilibrium
When the quantity demanded by consumers is equal to the quantity supplied by firms at a particular price.
Achievable in perfectly competitive markets. Market uses price mechanisms to adjust – will rise when there is excess demand and fall when there is excess supply.
(Draw graph showing equilibrium to demonstrate).
Allocatively efficient -> Marginal Benefit = Marginal Cost
Explain excess demand
Limited supply (demand outstrips supply), consumers who value the good will offer more so prices will rise.
As prices rise, demand will decrease and supply will increase until the market clears and price stabilises
Explain excess supply
Too much supply for demand (supply outstrips demand), producer will drop their price in order to sell more.
As prices fall, demand will increase and supply will decrease until markets clear and prices stabilise
What are assumptions of/conditions for perfectly competitive markets?
- Homogeneity; goods and services are the same, standardised and indistinguishable.
- Many sellers and buyers; price-takers
- No restrictions on buyers or sellers entering or exiting the market (contestability);
- Buyers and sellers well informed (about the characteristics of the good and prices – easy and costless to access info);
Examples in health care:
- Homogeneity - varies eg. over the counter goods
- Many buyers and sellers - variation eg. urban vs rural, GP vs specialist
- No barriers - training and licensing, patents
- Full information - Dr-patient and info asymmetry, risk of SID
Explain technical efficiency
Relationship between resources and outcome. Using all available resources to maximise utility/outcome.
Point at which a producer cannot produce more output without more inputs.
Explain economic efficiency
Relationship between cost and outcome. Creating maximum benefit with the resources for a given cost.
Point at which a producer cannot produce more outputs without increasing cost.
Explain allocative efficiency
Relationship between supply and demand. Factors of production have been allocated to meet demand.
Takes into account both production and distribution.
Looks at social welfare – social welfare is maximised when marginal social benefit is equal to the marginal social cost.
What are the benefits of perfectly competitive markets?
- DYNAMIC responds to changes in preferences and cost
- Automatically adjust to achieve EQUILIBRIUM
- Supply meets demand, (ALLOCATIVE EFFICIENCY)each unit of output produced when additional benefit it brings exceeds its cost
- Adjust costlessly, dynamic, does not require central planning
- Generate optimal outcomes to be competitive (technical efficiency)
Other proposed benefits include:
- improved customer service and innovation (incentivised)
- resiliency (more participants)
- voluntary cooperation
- equity
Explain monopoly as a market failure
What policies can be implemented to address monopolies?
Single supplier in market (due to few close substitutes and barriers to entry);
No longer price taker but sets price and output
Example: patented drug
Price = Higher Output = Lower Inefficienct = deadweight loss due to decrease in consumer surplus
Policies:
- Price controls
- Break up monopolies
- Get firms to compete for monopoly
Explain externalities as a market failure
What policies can be implemented to address externalities?
Cost or benefit arising from transaction falls on people who don’t participate in the transaction
Positive – Undersupply
Negative – Oversupply
Inefficient = Loss to society due to over/undersupply of costs/benefits (deadweight loss)
Example:
Positive = vaccine
Negative = air pollution
Policy:
Positive - Subsidies and incentives
Negatives - Taxes
Explain public goods as a market failure
What policies can be implemented to address public goods?
Goods or services that are non-rival (consumed simultaneously) and non-excludable (no-one excluded from benefits).
Output = Undersupply in competitive markets due to free riders, government must provide
Example: mosquito spraying program
Policy: Direct delivery or financing has to be provided by government
Explain adverse selection as a type of information asymmetry
What policies can address it?
Before transaction.
High risk individuals more likely to purchase insurance – raises premiums
Lack of coverage – low risk individuals and those who cannot afford do not have insurance.
Policy:
- Compulsory insurance
- Enrolment of families
Explain moral hazard as a type of information asymmetry
What policies can address it?
After transaction. Private information changes individual behaviour
Ex ante - risky behaviours
Ex post - low cost = overconsumption.
Creates loss of social welfare.
Policy: Co-payments/user fees
What are some of the issues with introducing co-payments and user fees to address information asymmetry?
- Can disproportionally affect lower income groups
- Reduces demand for effective treatments
- Providers may induce demand
- No alternative available in LIC (no/low tax base)
Explain the agency relationship as a type of information asymmetry/moral hazard
Principal delegates responsibility to an agent to act on their behalf.
Asymmetry as the agent has more info, principal cannot observe performance
Example: Dr-Patient relationship
Can lead to supplier-induced demand (type of moral hazard) – demand in excess of what patient would have chosen if had all information.
Difficult to diagnose and prevent.
