Week 9

Question 1

The competitive model

Answer 1

focuses on the price and quantity of services utilized. These variables are set by the economic forces of supply and demand. For a service to be utilized, it must be both demanded and supplied. There can be a demand without a supply; and there can be a supply without a demand. In a competitive market, unless some restrictions are placed on the market, the quantities supplied and demanded will be the same.

Question 2

Behavioral relationships.

Answer 2

The economic “forces” influencing these phenomena have been referred to as demand and supply. The strength of these forces can be increased or decreased by individual factors, such as incomes and tastes on the demand side, and input prices on the supply side. Demand can be increased, for example, by higher consumer incomes, and supply can be decreased by higher input costs. As a consequence of changes in causal factors, demand or supply will change, as will price and quantity. Our models should be able to predict such causal chains of events.

Question 3

4. Competition:

Answer 3

A state of competition exists in a market if no single firm or consumer is large enough to influence the market price. This state usually occurs if there are many buyers and sellers in the market.

Question 4

COMPETITIVE PRICE

Answer 4

1. The price at which demand and supply are in equilibrium in a competitive market.

Question 5

MARKET

Answer 5

A network of buyers and sellers whose interaction determines the price and quantity traded of goods and services.

Question 6

MARKET STRUCTURE

Answer 6

Those organizational characteristics of a market that determine the relationship of sellers to sellers, buyers to buyers, and sellers to buyers.

Question 7

Market equilibrium / equilibrium price

Answer 7

1. Only when buyers are satisfied with the quantities they purchase at the established price and sellers are making maximum profits will market equilibrium be established (i.e., quantity supplied equals quantity demanded).

Question 8

Market Price

Answer 8

In a competitive market, a single price will emerge that clears the market. Competitive bidding will lower the price if a surplus of output exists (i.e., if there is unsold output or excess capacity) and will raise the price in the case of a shortage.

Question 9

Utilization

Answer 9

refers to the actual quantity traded in the market.

Question 10

identify the assumptions of the competitive market model.

Answer 10

1. The demand assumptions include tastes, incomes, and other prices, all of which are components of individual demand curves, and the number of demanders which influences market demand.
   
   2. if the price is higher, say, $50, then 500 units of service will be demanded, whereas the suppliers will be prepared to supply 900. To eliminate this excess capacity, physicians will lower prices and the amounts supplied. The quantity demanded will increase at the same time. The process goes on until both groups are simultaneously satisfied. The quantity supplied will just equal the quantity that consumers demand. The same process will occur in reverse if the price is below $40, in which case prices will be driven up to the equilibrium point.
   3. The supply assumptions include cost factors and behavioral assumptions, which influence individual supply, and the number of suppliers, which influences market supply.
      Suppliers pursuing profits and demanders pursuing utility will interact with one another. This process leads to the establishment of price and quantity, which are the predictions of the competitive market model.

Question 11

make predictions about market price and quantity utilized, based on the competitive market model.

Answer 11

1. A single price, called the competitive price, will be established in the market. At this price, the market is in equilibrium. Assuming that the values of the underlying variables (demand and supply factors) remain static, there is no impetus for this price to change.
   The market clears at the competitive price, and the quantity utilized is set. At this equilibrium point, quantity demanded is equal to quantity supplied.

Question 12

predict how market price and utilization change in response to changes in demand and supply shift variables in the short run.

Answer 12

1. short run is a period in which one or more of the inputs cannot be adjusted (increased or reduced). Those inputs that cannot be adjusted are called fixed, and include capital stock. The term short run also refers to the period within which there is insufficient time for new firms to enter a market or industry.
   
   2. In the competitive model, the individual firm is quite small relative to the market size, and cannot exert any control over price. If prices are high to begin with, each firm can make large profits. There is not enough time for new firms to enter the market and bid prices away. The competitive process is therefore limited.
      However, this statement does not mean that the competitive process does not work. Forces of supply and demand are still at work, even in the short run, to increase and decrease prices and quantities utilized. The effects of two kinds of changes on price and quantity—changes in demand and changes in supply—are examined below.

Question 13

predict how market price and utilization change in response to changes in demand and supply shift variables in the long run.

Answer 13

1. long run: a period over which all inputs can be increased, including the capital stock and specialized labour used in production. The term can also refer to the time frame within which new firms can enter a market or industry.
   
   2. The long-run market analysis is similar to that of the short run, except for the following point: If existing firms are making above-normal profits, then supply will increase (as a result of the expansion of existing firms or the entry of new ones). The rightward shift in the supply curve will result in lower prices and lower profits for each firm. Eventually, all above-normal profits will be bid away.
   3. Thus, a prediction of the long-run analysis of the competitive market is as follows: If there are above-normal profits, supply will increase, price will fall, and eventually above-normal profits will give way to normal profits. A normal profit is the profit rate that could be earned in other industries.

Question 14

predict how market price and utilization change in response to simultaneous shifts in demand and supply.

Answer 14

1. Simultaneous shifts occur for a number of reasons. Factors that solely affect demand may be changing at the same time as factors that solely affect supply. For example, more people may move in to a region, shifting the demand curve for medical care to the right, and at the same time, productivity may fall, shifting supply to the left.
   In other instances, the same factor may influence both demand and supply. For example, there may be a sudden flu epidemic that makes people seriously ill. This causes demand to shift to the right. Because of the severity of the cases, the cost per case increases, and supply also shifts upward.

Question 15

Rightward shift/Increase in demand
Rightward shift/
Increase in supply

Answer 15

Quantity will always increase, but the new price may be lower or higher than the old one (i.e., the change is indeterminate).

Question 16

Rightward shift/Increase in demand

Leftward shift/
Decrease in supply

Answer 16

Price will always increase, but the change in quantity will be indeterminate.

Question 17

Leftward shift/
Decrease in demand

Rightward shift/
Increase in supply

Answer 17

Price will always fall, but the change in quantity will be indeterminate.

Question 18

Leftward shift/
Decrease in demand

Leftward shift/
Decrease in supply

Answer 18

Quantity will always decrease, but the new price may be higher or lower than the old one (i.e., the change is indeterminate).

Question 19

DISEQUILIBRIUM

Answer 19

A state in which a market is not in equilibrium (demand and supply are not equal). As a result of a shift in demand or supply, a market will be in disequilibrium until the price and quantity adjust to the new equilibrium levels. A state of disequilibrium can be permanent if there is some barrier (e.g., government price control) that permanently maintains the price at a level above or below that of equilibrium.

Question 20

SURPLUS

Answer 20

(1) For a tax-exempt firm, total revenue minus total expense (the counterpart of profit for a investor-owned firm). (2) For a market, the excess of quantity supplied over quantity demanded at a given price.

Question 21

SHORTAGE

Answer 21

An excess of supply over demand at a given price.

Question 22

predict quantity demanded, quantity supplied, quantity utilized, and shortage when price isbelowthe equilibrium price.

Answer 22

1. A shortage exists whenever the quantity demanded exceeds the quantity supplied at the current price. Under competitive conditions, the price would rise, quantity demanded would fall, quantity supplied would increase, and the shortage would be eliminated.
   
   2. However, if the price to consumers and suppliers is set administratively, as it is under Medicare in Canada, then the quantity demanded may exceed the quantity supplied.
   3. If the price to consumers is zero, as it is for hospital care and most physicians’ services, then the quantity demanded may be quite high. If the per unit reimbursement is not high enough to induce all demands to be met, then there will be shortages.
      A shortage is evidenced by waiting lists for health services. Waiting lists for both hospital services and some physician services currently exist in Canada. While there is considerable debate about how severe these waiting lists are, they are clearly a result of the way the Medicare system is set up.

Question 23

predict quantity demanded, quantity supplied, quantity utilized, and shortage when price is above the equilibrium price.

Answer 23

1. When the existing price is above the market equilibrium price, and it is not allowed to fall to equilibrium, then a situation occurs wherein the quantity supplied is greater than the quantity demanded; that is, there is a surplus. As long as the price is maintained above the equilibrium price, this situation will persist.
   
   2. A surplus is recognized by excess capacity. If a hospital or a nursing home has empty beds that it would be willing to fill if patients were available, then this situation represents a surplus. If a physician’s practice is willing to accept more patients, but none are available, then this situation also represents a surplus.
      If the price were allowed to fall, the surplus would disappear. A funding or reimbursement agency that sets rates too high can create a surplus.

Question 24

predict quantity demanded, quantity supplied, quantity utilized, and shortage for a given reimbursement rate and a consumer’s price of zero.

Answer 24

Under the Canadian Medicare program, insured individuals are provided with medically necessary care at no direct (out-of-pocket) cost. The provincial governments pay the providers directly. The demand/supply framework can be used to predict what will happen to the quantities demanded, supplied, and utilized under these conditions.

	3. We now have data for quantity demanded, quantity supplied, and quantity utilized. Quantity demanded is 500 days, quantity supplied is 300, and quantity utilized is 300 days (you cannot use any more than is supplied). Thus, there is a shortage of 200 patient days.
	4. The degree of the shortage, if any, will depend on the reimbursement rate. A lower rate will cause a reduction in quantity supplied (and a greater shortage), while an increase in the per diem reimbursement rate will cause an increase in the quantity supplied (and a reduction in the shortage). Eliminating the shortage (if enough voters complained to their MLAs) could be done in a couple of ways, as described below.

		1. The government might choose to raise the reimbursement rate, say to $200 per day. As shown in Figure  .1 above, this price would raise the quantity supplied (along Supply 1) to 400 days, reducing the shortage by 100 patient days. But the cost would increase from $45,000 to $80,000. This sum may be more than the government is willing to spend. The government might ease up on the quality of care, allowing hospitals to hire less qualified workers, for example. Under this circumstance, the supply curve would shift to the right, say to Supply 2. At the old reimbursement rate of $150 per day, 400 units would be supplied. However, the quality of care will be eroded, even though the shortage would be reduced.

Question 25

predict quantity utilized and price in the market for product A when there is a change in the market price for related product B.

Answer 25

1. This section analyzes the effect that changes in the price of one market may have on the price and quantity utilized of a related market. In health care, there are many related markets. For example,
   1. inpatient and outpatient surgery are substitutes. An increase in the direct (out-of-pocket) price of inpatient surgery will cause an outward shift in the demand for outpatient surgery.
   2. nursing home care and hospital care are often substitutes. Patients may be discharged early from acute care hospitals and transferred to less expensive nursing homes, with a lower (but still adequate) level of care.
   3. home care and hospital care are sometimes substitutes. Some patients may be discharged early from hospitals if they can receive health care at home.
   4. surgeons’ services and surgery room care are complements—more surgeries lead to an increased demand for surgical room time.
   An increase in the direct price of a service (e.g., inpatient care) will cause an outward shift in the demand for the substitute (e.g., nursing home care), and this shift will result in a higher price and quantity utilized for the substitute (nursing home care).