The Economics of Health and Health Care 7th Edition (Folland / Goodman / Stano) Chapter 2: MIcroeconomics Tools for Health Economics The microeconomic tools developed in this chapter consist of the production possibility frontier, demand-and-supply analysis, utility and indifference curve analysis, production and cost curves of a typical firm, firm behavior under competition and monopoly, and the measure of welfare loss. The economic tools used later in the text apply or extend the tools developed here. By learning these ideas, you will gain an understanding of the terminology used in health economics, as well as an understanding of the type of reasoning used. Summary 1. The concept of scarcity underlies much economic thinking. Scarcity necessitates that decision makers make trade-off decisions at the margin. The production possibilities frontier represents these trade¬offs, and its slope represents the opportunity cost of one good in terms of the other. 2. Supply-and-demand analysis of competitive markets is a basic tool of economics and provides in¬sights that extend beyond the theoretical, perfectly competitive markets. Supply reflects sellers offers as a function of price, and demand reflects buyers offers as a function of price. The intersection of demand and supply describes the market equilibrium. 3. Comparative static analysis of demand and supply finds the new equilibrium after economic events shift either curve. Demand-increasing (-decreasing) events tend to raise (lower) equilibrium price, while supply-increasing (-decreasing) events tend to lower (raise) equilibrium price. 4. A relationship between one or more independent variables yielding a unique value for the dependent variable is called a function. The linear demand function, showing demand as a straight line, is only one special case of the many possibilities. 5. The utility function summarizes a consumers preferences. Higher utility numbers are assigned to consumer bundles that provide higher levels of satisfaction, meaning that the consumer prefers these bundles. 6. Indifference curves are collections of points describing bundles that yield the same utility and hence the same level of satisfaction. Well-behaved indifference curves are downward sloping, continuous, and convex to the origin. 7. The budget constraint represents the combinations of goods that the consumer can afford given his or her budget. The budget constraint is downward sloping, and its slope is the negative of the ratio of prices. 8. In consumer theory, the consumer maximizes utility subject to a budget constraint. This means that the consumer picks the most preferred consumer bundle from among those he or she can afford. The equilibrium occurs at the tangency between the budget constraint and the highest attainable indifference curve. 9. Price elasticity depicts the responsiveness of demand to changes in price. It is defined as the ratio of the percentage change in quantity demanded to the percentage change in price. Each other elasticity also represents the ratio of a percentage change in a dependent variable to a percentage change in a given independent variable. 10. The production function describes the relationship of inputs to output. The marginal product of an input is the increase in output due to a one-unit increase in the input holding all others constant. That marginal product tends to decline as more input is added describes the law of diminishing marginal returns. 11. The average total cost curve of a firm shows the total cost per unit of output. The marginal cost curve shows the extra cost required to produce an additional unit of output. 12. The competitive firm in the short run produces that output where price equals marginal cost. The marginal cost curve is therefore the supply curve of the competitive firm. 13. In long-run equilibrium, entry by competing firms forces the typical competitive firm to produce an output level such that its price equals its minimum average cost. At this output, the competitive firm is producing the economically efficient output, and it is earning zero economic profits. 14. The pure monopolist faces the entire downward sloping market demand curve, and this implies that its marginal revenue lies below the demand curve. The monopolist restricts output, by comparison to the competitive case, and it charges a higher market price. 15. The pure monopoly case is one instance of a market in which a welfare loss occurs. A welfare loss, represented by an area under the demand curve and above the marginal cost curve, is an opportunity for mutual gains that is being foregone by the market.
Posted on: Fri, 02 Jan 2015 16:00:00 +0000
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