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ESHPM - Jaar 3 > Minor - Week 1 > Flashcards

Minor - Week 1 Flashcards

1
Q

10 Economic principles categories

A
  • How people make decisions
  • How people interact
  • How the economy as a whole works
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2
Q

How people make desicions

A
  • People face trade offs
  • The cost of something is what you give up getting it (opportunity costs)
  • Rational People think in margin (cost and benefits)
  • People respond to incentives
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3
Q

How people interact

A
  • Trade can make everyone better of (specilazation, lower costs)
  • Markets are a good way to organize economic activity (adam Smith invisable hand and allocation resources)
  • Goverments can sometimes improve market outcomes
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4
Q

How the economy as a whole works

A
  • A country’s standard of living depends on its ability to produce goods and services
  • Prices rise when the government prints too much money
  • Society faces a short run trade off between inflation and unemployment
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5
Q

Efficiency

A

the property of society getting the most it can from its scare resources

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6
Q

Equality

A

the property of distributing economic prosperity uniformly
among the members of society

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7
Q

Production possibilities frontier

A

We must choose between to goods, cars and covid 19 medicines
- Changes as oppertunity costs increases

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8
Q

Incentives

A

Something that induces a person to act
- Policymakers can influence the incentives (costs and benefits) and can change behavior

Higher price
Buyers – consume less o
Sellers – produce more

Public policy > government
o Change costs or benefits
o Change people’s behavior

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9
Q

First law of supply

A

High price the grater the quantity of supplies
- Aanbodlijn is stijgend

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10
Q

First law of demand

A

the higher the price the lower the quantity is demanded

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11
Q

Governments can sometimes improve market outcomes

A

We need the government to
o Enforce rules
o Maintain institutions (your company or mine) – key to market economy
o Enforce property rights

Can change outcomes with
- Intervention
- Promote efficiency
- Avoid market failure
- To promote equality
- Avoid differences in economic well being

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12
Q

Enforce property rights

A

Ability of an individual to own and exercise control over scarce resources

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13
Q

Market failure

A

Fails to produce an efficient allocation of resources

  • externality
  • Market power
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14
Q

Utility maximization theory

A

consumers maximize their utility subject to a budget constraint

  • Marginal utility is assumed to
    decrease with consumption
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15
Q

MRS

A

Marginal rate of subsitution; equal to the negative slope of the indifference curve

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16
Q

Supply and demand

A
  • Demand as result of utility maximization
  • Supplies derived from cost
  • Equilibrium price and quantity
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17
Q

Traditional assumptions of economics

A
  • Always want to maximize utility for lifetime
  • Needs and desire are infinite, yet resources are scare ->
  • Scarcity creates choice
  • opportunity costs must be taken in to account
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18
Q

Homo economicus

A

Is able to understand, predict and prescribe rational desicions in life.
- Rational
- Self interested
- Utility maximization (own utility)

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19
Q

Indifference curve

A
  • Higher curves is more utility
  • What is possible with the indifference curve and the frontier?
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20
Q

Formula utility maximization

A

(MUx / Px) = (MUy / Py)

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21
Q

Preferences & utility

A
  • A> B (strong preference)
  • A gelijk of groter dan B (weak preference)
  • A ~ B (indifferent)

If you prefer A over B, then your utility is higher with A  U(A) > U(B)

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22
Q

Ordinal and cardinal utility

A
  • Cardinal is numerical
  • Ordinal (more than…)
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23
Q

Rational choice axioms (basic components of rationality)

A
  • Completeness
  • Transitivity
  • Monotonic
  • Self interest
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24
Q

Completeness

A

Either A or B, all alternatives can be compared.
- Preferences for all options
- Information and ordening

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25
Q

Transitivity

A

logical and consistent ordening of goods
- Constant steps
- A over B, B over C etc.

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26
Q

Monotonic

A

Utility rises with more goods

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27
Q

Sorts of monotonic

A
  • Weakly monotonic; Preferences to have more of a bundle (goods X and Y, gas and cars)
  • Stronly monotonic; more of one (happy with X more), if given a bundle, that has at least more of one good; leads to more utility
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28
Q

instrumental rationality

A
  • Consistent proces of making choices
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29
Q

Rational behavior, two elements

A
  • internal consistency; (instrumental rationality; completeness, monotonicy and transivity)
  • Reasoned pursuit of self interest
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30
Q

Lottery 1: 10% chance of U=15, 90% chance of U=5

A

Under risk or uncertainty will try to maximize our utility
- Cardinal utility you can calculate

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31
Q

Example: Lottery 1: 10% chance of U=15, 90% chance of U=5

A

EU = 0.115 + 0.95 = 1.5 + 4.5 = 6]

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32
Q

Rational behavior has two elements

A
  • Internal consistency (instrumental rationality; completeness, monotonicy and transitvity)
  • Reasond persuit of self interest
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33
Q

Critisism on traditional model

A
  • Rational choices; informed
  • Stable preferences
  • Independent
  • Content
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34
Q

Rational choices, can we make when?

A

Only when we are truly informed
- Cardinal
- Calculate risk and utility

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35
Q

Stable preferences

A

Preferences are stable and do not change over time, between whealty and poor or cultures
- Not the product of social system

But it is not the case!

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36
Q

Independent

A

Decisions are independent
- Not affect each other
- Not comparing utility

Not the case!

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37
Q

Without content

A
  • Only cares about what preferences and consistancy
  • Not Why
  • No matters on if preferenceses are good or meaningfull
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38
Q

Procedural in variance

A

Preferences are consisent and independent of the method used to elicit

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39
Q

Preference reversals

A

Lottery to see how the preferences changed
- First say A > B, then when asked again B > A (YOU COMPARE!)

40
Q

Laissez faire thinking

A

You know your own preferences and government should not intervene in what is meaningful and good

41
Q

Alternative models to traditional, that take in to account the not rational part

A
  • Simon’s bounded rationality: incomplete info, time constraints and cognitive limitations satisficing behavior (happy when we get to certain utility level)
  • Prospect theory: relative positions rather than absolute ones
    o Mill: ‘Men do not desire to be rich, but to be richer than other men’
42
Q

Why not lose the rational utility maximizer?

A
  • People try do maximize in many situations; determined by the capacity of explaining and predicting
  • Natural selection;
    Violation of rationality will flip you out of the market
    Deviate, not maximize utility and pushed out of market system
43
Q

Positive economics

A

Understand and describe observed choices

  • Descriptive
  • Why a to high weightening?
44
Q

Normative

A

Prescriptive
- Define and prescrive optimal choices
- Calculate

45
Q

allocation

A

Redistribute scares recourses

46
Q

Scarcity

A

Never enough resources to satify all human needs –> choices

47
Q

Welfare economics

A

normatieve judging whether state a or B is better in terms of social welfare

48
Q

How to determinate if A is better than B welfare wise?

A

Ethical framework
- Utility principe
- Individual sovereignty;individuals are themselves the best judges of what
contributes to their utility and how much that contribution is.
-Consequentialism; utility oly derived from outcomes and not process itself
- Welfarism; goodness judged by utility levels in that situation

49
Q

Utility maximizers

A
  • Self interest
  • Given; income and prices
50
Q

Income effect

A

Lotto effect
reflects the change in consumers real income as result of a price change
(purchasing power)

51
Q

Subsitution effect

A

The effect when a relative price change occurs and the shift in quantity demanded of a good
- Shift to more expensive or cheaper products

  • Lead to new preferences of bundle
  • What is then the highest attainable
52
Q

Total Price effect (PE)

A

The change in prices influence the overall quantity demanded of a good or service

53
Q

Determants demand good X

A
  • Price of commodity
  • rices of other commodities (compliment or subsitutes)
  • Preferences
  • Income
54
Q

What you are willing to pay reflexts?

A
  • Also oppertunity costs
55
Q

Demand curve

A
  • Indicates Marginal benefit
  • Ceteris paribus
  • All people on market; aggregation
  • stronger preference for good or they have a higher income
56
Q

perfect market, firms have ?

A

No market power
- P=Mc

57
Q

Supply curve

A
  • Indicates Mc
  • Firms seek for maximize profits
58
Q

Equilibrium:

A

demand and supply are perfectly balanced

59
Q

Example: Qd > Qs

A
  • More demand than supply
  • People will offer higher
    prices (resulting, ideally, in
    more supply)

Resulting in equilibrium again

60
Q

Any distortion will be fixed through price signals

A
  • Too much supply  lower price  more demand and lower supply
  • Too much demand  higher price  lower demand and higher supply
61
Q

consumer surplus

A

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. They gained happiness

62
Q

producer surplus

A

The amount a seller is paid for a good minus the seller’s cost of providing it

63
Q

Total surplus

A

Total surplus = (Value to buyers – Amount paid by buyers) + (Amount received by sellers Cost to sellers).

64
Q

pareto optimallity

A

An allocation is Pareto-optimal if you cannot reallocate (e.g. through exchange
on a market) in such a way that at least one person is better off and none is
worse off

65
Q

Pareto aspects

A
  • Measure and compare utility (sum )
  • Utility is not comparable, but handy in pareto, when no one is worse off
66
Q

potential pareto

A
  • Gains must be lagere enough for winners to possibly compensate for losers
  • Not compensation is not needed
  • Assumption; : utility value of money equal
    –> essential for CBA; benefits higher than losses
67
Q

Competitive markets

A

Results in Pareto optimallity even without government intervention
- Complete information
- No market powers
- enter en exit market
- no externalities (bear full costs and benefits)

68
Q

Pareto en efficiency

A

Pareto can lead to efficiency but not to equity
- Income is fixed (not how income is distributed)
- pareto optimal; one has evertything and one has nothing, one is always worse of is it’s more equity

69
Q

Marketoutcome is not optimal for healthcare (arrow 1963)

A
  1. Uncertainty and consequences of insurance
  2. Information asymmetry
  3. Existence of externalities
  4. Market power
70
Q
  1. Uncertainty - Moral hazard and adverse selection
A
  • Uncertainty when you can yet a disease of illness (we dont no the chances of getting sick)
  • Risk aversion
71
Q

Insurance market; why not voluntary?

A
  • adverse selection (high risks, that is profitable); premium higher in future
  • Cream skimming; attract good profitable risks
72
Q

Mandatory insurance how risks pooled

A
  • Income related in stead of risk related
  • Risk solidarity and income solidarity –> risk equalisation
73
Q

Risk equalisation

A

Competing healthcare insurancers execute risk and income solidarity

74
Q

Consumer moral hazard

A

Full insurance customer feels no costs –> will overconsume

  • incentive overconsumption; consuming beyond the
    point where benefits exceed costs:
75
Q

welfare loss

A

consuming beyond the point of benefits;
- Costs are ultra high
- Consumer pays nothing

76
Q

Ex ante moral hazard

A

Less prevention and more risk
- You have insurance so why a healthy lifestyle?

77
Q

Ex post moral hazard

A

Demand increases and take more expensive healthcare
- Dont have to pay anayway

78
Q

How to reduce moral hazard?

A
  • instance cost sharing
    (incentive to not overconsume, because you have to pay, decrease demand).
79
Q

Problem cost sharing

A
  • Poor react stronger to such incentives
  • Pushed out of the market; efficiency comes to a premium that is average with the risks, but poor can’t afford even
80
Q

Jeopardize efficiency

A

Some people pushed out of the market of efficiency thinking

Denk aan plaatje welfare loss, rechter hoekje

81
Q

Supplier induced demand or producer moral hazard (assymetric information)

A

Supplier more knowlegde (agent)
- Agent must formulate her demand
- serves own well being as well (self interested)
- Can influence demand

82
Q

Producer moral hazard

A

behavior that might lead to more consumption
because the producer might be maximizing his/her profits

83
Q

Externalities

A

An (often unintended) impact (positive or negative, cost or benefit) of an action of one party on another party not involved in that action

  • Costs or benefits not percieved by the costumer
84
Q

Externalities and optimum vaccinations (subsidy)

A

Social desirable is higer
- Subsidy will increase demand curve will be less steeper and Qs is reached (more vaccinations)
- Relative price has changed

85
Q

Market power in healthcare

A
  • Not easy to step in and out
  • ## Much market power of existing suppliers (insurers and suppliers)
86
Q

equity in healthcare

A
  • Willingness and ability to pay inadequate to distribute health care?
  • Poor would then consume less care (and be sicker and poorer from that..)

Goverment has to intervene! (subsidies, quality control, accesability and solidarity)

87
Q

Is health only outcome for utility?

A
  • NO!
    utility is also derived from other things

Made a trade of between health and hapiness

88
Q

Rational addiction - Becker and murphy

A

People maximize utility and may
still enter into addictive behavior

  • They may take full account of
    future costs and consequences
    (subjectively assessed)
  • Time and time preference
    important
89
Q

Becker and murphy formula

A

U(t) = U[c(t) * S(t) * y(t)]

C= consumption of addictible stock
S= addictive capital stock (depends on C) - accumulatie verslavingsgedrag
Y= inkomen

90
Q

Reinforcement:

A

greater past consumption of addictive goods increases
desire for present consumption (dc/dS > 0)

91
Q

Tolerance

A

utility from a given amount of consumption is lower when past
consumption is greater

92
Q

Addictions

A
  • More likely with higer discount rates
  • Respond to price changes such as taxes
  • Taxes to correct for externalities
93
Q

Timing and costs and effects

A
  • Health behavior involves current costs and future health benefits
  • People discount hyperbolicly; lead to time inconsistenciesTi
94
Q

Time inconsistencies

A

You value X on time 1 other than on time 2.

  • Not in line with traditional economics; where preferences are the same and consistent
95
Q

Positional concerns

A

Comparing to others
- Less prominent in healthcare, because it is about absolute concerns

96
Q

Adaptation

A

People become less healthy due to a shock, their utility will decrease
significantly, however after a while their utility level might adapt and increase again

ESHPM - Jaar 3 (9 decks)

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