Introduction When studying market structure, the First Fundamental Theorem of Welfare Economics states that markets will distribute resources efficiently if the following conditions are met: the market is perfectly competitive, there are no externalities or public goods, markets are complete, and there is no asymmetric information (Gruber, 2013). If a healthcare market complied with these four pillars of the First Welfare Theorem, a healthcare provider’s choice of output would not affect the price of the service, ultimately leading to Pareto efficiency. As seen in Figure 1, the consumer demand curve would be horizontal, as average revenue, marginal revenue, and price would be the same, constant value.
Figure 1: Perfect Competition
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If the provider produces one extra unit of a good or service, the overall price decreases. The provider receives a lower price for infra-marginal goods, or the goods that would have been sold without reducing the price (Png, 2012). For example, if a healthcare provider chooses to increase production from 100 units to 200 units, the price must be reduced from $50 to $40. The provider will gain revenue (100 x $40= $4,000) from the additional units, but will lose ($50-$40) x 100= $1,000) the 100 infra marginal units that the provider could have sold at the higher price. So, average revenue for the provider will be $40, while marginal revenue will be $30. Thus, average revenue and price remain equal, while marginal revenue now falls below the price curve (Png, 2012).
Figure 2: Marginal Revenue Curve vs. Average Revenue Curve in a Monopoly In order to determine price, the monopolist utilizes the inverse demand curve, also known as the average revenue curve. This curve reflects the price the provider would need to charge to produce demand at a particular level. Thus, the average revenue curve dictates what price the next unit can be sold at, while the marginal revenue curve reflects how much additional revenue is received for selling the next unit (Schwartz, 2010). As can be seen in Figure 3, since marginal revenue does not equal average revenue, the monopolist will set the quantity supplied where marginal revenue is equal to marginal cost. However, it will
This graph is specific to an oligopoly and shows the change in quantity demanded in relation to the change in price for both elastic and inelastic goods. Total Revenues will be increased, if the firm decreases their price but increase their quantity. Due to the fact that the costs remain the same, the revenue line on the graph can be seen to be steeper than the costs meaning that the profit is higher. The graph therefore also indicates the point where the firm is able to make the most amount of profit, in relation to the price they set and the quantity they produce.
However, if the school allows a competing student the right to sell ice cream on school property, it could change the price of ice cream. The price of ice cream is lowered due to technology. The invention of better ice cream machines or an idea to make better use of counter space can lower a firm’s cost and raise the quantity of ice cream it supplies. Prices could also be increased due to input prices. Less ice cream is supplied when workers need be paid more, therefore ice cream machines cost more, or even ingredients like
Supply and demand forms the most fundamental concept of economics. Whether you are a teacher, farmer, medical supply manufacturer, doctor or simply a consumer the fundamental foundation of supply and demand equilibrium is incorporated into the daily behaviors of our society. Consumers naturally look for the lowest price, while producer are influenced to expand outputs at greater cost. This is the same phenomenon in healthcare. With congress enacting the Affordable Care Act, many are seeking out the cheapest form of insurance, while at the same time wanting the greatest benefits.
There are so many different health care providers and types of health care services that we as consumers can receive. All those different services or facilities are going to have competitive prices for our medical care. I think a patient as a consumers are going to benefit from this. Not only do medical facilities have competitive prices but also insurance
The marginal analysis in relation to health care economics is a way of thinking about the optimal allocation of resources and making decisions at “the margin” (Henderson, 2015). Self-interest relates to economic decision makers’ personal interest that affects the decisions they make (Henderson, 2015). The markets and pricing concept is used to efficiently allocate the resources that are considered scarce (Henderson, 2015). The supply and demand concept is used as a tool in performing economic analysis (Henderson, 2015). Competition creates an environment where resource owners are forced to use their resources to promote the highest possible satisfaction of society (Henderson, 2015). Efficiency is used to measure how well resources are being used to promote social welfare (Henderson, 2015). Market failure is when the free market fails to promote the efficient use of resources (Henderson, 2015). Comparative advantage explores people benefit from the voluntary exchange when production decisions are based on opportunity cost (Henderson,
The following figure shows the demand, marginal revenue, and marginal cost curves for a profit maximizing monopolist.
(1)Perfect competition is the market in which there is a large number of buyers and sellers. The goods sold in this market are identical. A single price prevails in the market. On the other hand monopoly is a type of
This causes the price and the quantity move in opposite directions in a supply curve shift. Also, if the quantity supplied decreases at any given price the opposite will happen.
Perfect competition is an idealised market structure theory used in economics to show the market under a high degree of competition given certain conditions. This essay aims to outline the assumptions and distinctive features that form the perfectly competitive model and how this model can be used to explain short term and long term behaviour of a perfectly competitive firm aiming to maximise profits and the implications of enhancing these profits further.
A competitive market is one that allows easy entry and exit: a market in which companies are generally free to enter or to leave at will. This does not describe the health care market in the US. There are certain assumptions that the competitive market model operates under some assumptions, first is the consumer/patient has full information about the nature of the services required, the anticipated results of their decision and the benefits obtain from the service. This is not true in health care often time the patient is operating at a distinct information disadvantage when they require health care services such as insurance. If a patient purchases health insurance often they don’t know enough information to ascertain if they have
Understanding the fundamental concepts of economics allows us to analyze laws that have a direct bearing on the economy. These laws and theories are essentially the backbone of how economics is used and studied. The law of demand can be expressed by stating that as long as all other factors remain constant, as prices rise, the quantity of demand for that product falls. Conversely, as the price falls, the quantity of demand for that product rises (Colander, 2006, p 91). Price is the tool used that controls how much consumers want based on how much they demand. At any given price a certain quantity of a product is demanded by consumers. As the price decreases, the quantity of the products demanded will increase. This indicates that more individuals demand the good or service as the price is lowered. This can be illustrated using the demand curve. The demand curve is a downward sloping line that illustrates the inversely related relationship of price and quantity demanded.
A set of graphs shows the relationship between demand and total revenue (TR) for a linear demand curve. As price decreases in the elastic range, TR increases, but in the inelastic range, TR decreases. TR is maximized at the quantity where PED = 1.
The following graph demonstrate the demand curve of how many items of a product or service a consumer would like to purchase at different prices. Now by having the product at a lower price, the more a consumer is likely to buy. For that same reason it can be concluded that the price is one major factor of the product demand.
a) In a perfect competitive market, the sole determinant of pricing is the market demand and the supply curves. A demand curve refers to the total amount that consumers will pay for their products. The supply curve is the total amount that the producers can actually make to supply to the company at the price they can afford or are willing to pay. Another factor in a perfect competitive market structure is the equilibrium price which is basically when the supply of the market meets the market demand of the consumers. Anther unique feature of a perfect competition market is that it is a price taker. In essence, this means that the company doesn’t have any influence on the price. Again, this can only be caused through a market that has a large number of firms with identical products. (Samuelson and Marks, 2010).