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Health Economics > Midterm Exam > Flashcards

Midterm Exam Flashcards

1
Q

What is Economics?

A

study of how societies use scarce resources

“Use” means:
- what to produce
- what to consume
- how to allocate production
- how to distribute resources

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2
Q

Why Economics?

A

because there is scarcity, there will always be trade-offs

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3
Q

Why Health Economics?

A

arose with the demand for a better understanding of our healthcare system

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4
Q

Why does the US spend so much more than other countries?

A
  • higher prices
  • higher administrative costs
  • higher intensity/utilization
  • more expensive technology
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5
Q

What is a perfectly competitive market?

A
  1. full information about good or service traded (buyers & sellers)
  2. potential buyers have full transparency about price they will pay
  3. no barriers to entry/exit
  4. large number of buyers and sellers: no market power to affect the price
  5. consumers are rational
  6. providers will maximize profit
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6
Q

Is the healthcare market perfectly competitive?

Does it fulfill: full information about good or service traded (buyers or sellers)

A
  • physicians may not agree on the diagnosis or the treatment
  • imbalance in information: physicians have more information than the patient (physician-agency problem; supplier induced demand)
  • patients know better than insurers how much health care they will use (adverse selection)
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7
Q

Is the healthcare market perfectly competitive?

Does it fulfill: potential buyers have full transparency about price they will pay

A
  • certainly not
  • even providers have little idea about how much services cost
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8
Q

Is the healthcare market perfectly competitive?

Does it fulfill: no barriers to entry/exit

A
  • medical licensure (barrier)
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9
Q

Is the healthcare market perfectly competitive?

Does it fulfill: large number of buyers and sellers: no market power to affect the price

A
  • some areas have few providers
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10
Q

Is the healthcare market perfectly competitive?

Does it fulfill: providers will maximize profit

A
  • large role of non-profits
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11
Q

Opportunity Cost

A

the cost of the highest valued alternative one gives up at the macroeconomic, or policy level, and at the microeconomic, individual level

Examples:
- Resources used for cancer treatment are not available for autism research
- Time spent by researchers working on opioid addiction treatment cannot be spent on childhood disease research
- Time spent by a person waiting for a free flu shot could have been spent earning an hourly wage

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12
Q

Production Possibilities Frontier (or PPC)

A
  • illustrates the trade-offs between two goods (or services)
  • shows how choices are constrained by the fact that we cannot have everything we want
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13
Q

The shape of the PPC occurs because of

A

the law of increasing cost

one reason for the law of increasing cost is the imperfect substitutability of resources

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14
Q

A point outside the PPC…

A

will only be attainable if the stock of resources rises, a new technology is discovered, or a change occurs in economic, political, or legal arrangements that improves productive relationships in the economy

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15
Q

Production efficiency

A

is attained when the economy operates at any point on the PPC

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16
Q

Allocative efficiency

A

is attained when society chooses the best or most preferred point on the PPC

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17
Q

Positive economics

A

concerns descriptions of facts, circumstances, and relationships in economics
- what is the growth rate in medical expenditures?
- studies show that a 10% increase in income → a 10% increase in medical expenditures

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18
Q

Normative economics

A

involves value judgments and ethics - deeply held moral sentiments - no right or wrong answers - must be determined by public policy
- to what extent should government subsidize the poor with medical care?
- should raising medical expenditures in the US be controlled?

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19
Q

Utility Analysis

A

the positive slope of the utility curve indicates that an increase in a person’s stock of health directly enhances utility

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20
Q

the shape of the utility curve demonstrates

A

the law of diminishing marginal utility

each successive incremental improvement in health generates smaller and smaller increases in total utility

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21
Q

How might the total product curve change over time?

A

new medical technologies have profoundly affected all aspects of the production of health

  • development of sophisticated devices
  • introduction of new drugs
  • application of innovative medical and surgical procedures
  • use of computer-supported information systems

in general, a change in any of the other variables in the product function alters the position of the total product curve
- total product curve may shift
- total product curve may rotate

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22
Q

Law of demand

A

the inverse relationship between price and quantity demanded

as price falls, the quantity of physician services demanded rises

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23
Q

What are other factors that affect the demand for medical services?

A

income, time costs, prices of other goods (complements/substitutes), health insurance features (coinsurance, co-payments, deductibles)

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24
Q

An increase in demand

A

is represented by a rightward shift of the demand curve

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25
Q

A decrease in demand

A

is represented by a leftward shift of the demand curve

26
Q

Moral Hazard

A

people who are insulated from risk behave differently than those who are exposed to it

with respect to insurance
- increases likelihood of purchasing medical services, ex-post
- induces higher spending in the event of an illness
- may increase risky behavior, ex-ante

hypothesis directly tested by RAND health insurance experiment

27
Q

RAND Health Insurance Experiment

A

One of the largest randomly controlled economic experiments ever conducted

Conclusion
- 40% increase in services on a free-care plan
- yet had little or no effect on health status for the average adult

28
Q

Elasticity

A

the percent change in the dependent variable resulting from a one percent change in the independent variable

Inelastic if E < 1
Elastic if E > 1
Unit elastic if E = 1

29
Q

What are some various forms that moral hazard might take?

A

over time, the consumer may have less incentive to guard against the insured event (more risky behavior)

because of insurance, there may be more of a demand for expensive medical technology - the adoption of these technologies may in turn raise the cost of health insurance

insurance may lower the incentives of the consumer to monitor the quality of health care providers

insurance lowers the incentive for the consumer to price shop - less comparison shopping means less competitive pressure on providers to lower prices

30
Q

Total Product Curve

A

initially, output rises at an increasing rate

eventually, output rises at a decreasing rate

31
Q

What determines the shape of the total product curve?

A

the principle of diminishing returns determines the shape of the total product curve

once output begins increasing at a decreasing rate, diminishing returns have set in

32
Q

In general, why do we see diminishing returns occur? But why doesn’t this matter in the long run?

A

because of the presence of a fixed input

but it doesn’t matter in the long run because in the long run, the quantity of all inputs can be changed

33
Q

Marginal product

A

is the change in total output associated with a one-unit change in the variable input

marginal product is also the slope of the total product curve at any point on the curve

marginal product rises until we encounter diminishing returns and then marginal product declines

34
Q

Average product

A

the total quantity of output divided by the level of the variable input

average product can also be measured as the slope of a ray from the origin to each point on the total product curve

35
Q

Cost function

A

the relationship between outputs and costs

36
Q

Production function

A

the relationship between inputs and outputs

37
Q

Implicit Costs

A

can be thought of as the value of benefits foregone (e.g., if you take a day off to go to a museum with your cousin who is visiting)

38
Q

Profit equation

A

total revenue - total costs

39
Q

Total revenue equation

A

price x quantity

40
Q

Marginal revenue equation

A

change in total revenue / change in quantity

41
Q

Total cost equation

A

fixed costs + variable costs

42
Q

Marginal cost equation

A

change in total cost / change in quantity

43
Q

Average cost

A

total cost / quantity

44
Q

Short-Run Total Cost Curve

A

first increases at a decreasing rate and then increases at an increasing rate once diminishing marginal returns set in

45
Q

Short-Run Per-Unit Costs

A

the marginal and average product curves are directly related to the marginal and average variable cost curves

the maximum points on the marginal and average product curves correspond to the minimum points on the marginal and average variable cost curves

short-run marginal cost intersects short-run average variable cost at the minimum point on the short-run average variable cost curve

46
Q

SMC and SAVC are ____ to marginal and average productivity

A

inversely related

47
Q

Marginal costs _____ as marginal productivity increases

A

decline

48
Q

Fixed costs

A

only occur in what economists define as the short run or the operating period

49
Q

The long run

A

the period in which all costs are variable or the planning period

50
Q

Hospital example (fixed costs vs. variable costs)

A

Fixed costs: include capital, employee salaries & benefits, and building maintenance

Variable costs: include patient care supplies, food, medications, radiographic film, and gloves

51
Q

Long-Run Costs of Production

A

In the long-run, all inputs including capital can be changed

The long-run average total cost curve, LATC is
- derived from a series of short-run cost curves
- represented different scale of services
- “envelopes” the short run average cost curves

Most efficient point of production is the SATC that minimizes LATC

52
Q

Economies of scale

A

means that the average cost falls as output rises

average costs fall as the medical firm becomes larger due to specialization of labor and capital

the proportional increase in total costs that would result from a proportional increase in output

occur when the proportional increase in total cost is LESS than the proportional increase in output (AC falling)

53
Q

Diseconomies of scale

A

means that average cost rises as output rises

occur when the proportional increase in total cost is GREATER than the proportional increase in output (AC rising)

54
Q

Economies of Scope

A

said to exist if it is possible to produce the outputs jointly in the same firm cheaper than it is to produce them separately

55
Q

Competitive Markets

A

Many buyers and sellers

No buyer or seller can have a significant impact on price

New firms can enter the market

56
Q

Noncompetitive markets

A

Smaller number of firms

Individual firm behavior can impact price

Single firm or monopoly

57
Q

Monopolist

A

charges a higher price and produces less

smaller consumer surplus

larger producer surplus

smaller total surplus

deadweight loss

Monopoly is a form of market failure

58
Q

Competitive Firm

A

charges a lower price and produces more

larger consumer surplus

smaller producer surplus

larger total surplus

no deadweight loss

59
Q

How might firms (e.g. pediatricians) enter the market?

A

established practices begin providing pediatric services as a part of their established portfolio

established pediatric practices open offices in a new city

young physicians (after medical school) may establish their own practices

60
Q

What might be the barriers to entry for these services (e.g. pediatricians)?

A

exclusive control over an input, sunk costs (initial investments), learning by doing/experience lower costs, limit pricing/economies of scale/ legal restrictions

Health Economics (1 decks)

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