1. What Basic Decisions are made in every economy? how are these decisions made in the American economy?
    • 1. Allocate Resources
    • 2. Determine the composition of output
    • 3. Distribute products
    • 4. Provide for Growth
    • In America price plays major role by converying consumer preference, Govenrment plays important role
  2. What factors shape demand? What factors shape supply?
    • Demand
    • Consumer Tastes
    • Consumer Income
    • Prices of substitutes and Compliments
    • Transaction Costs
    • Information

    • Supply
    • Increase in price
    • Particular period of time
    • Technology
    • Level of input prices
    • Taxes and government regulation
  3. Explain the difference between a change in demand and a change in quantity demanded.
    Change in demand = shift in the entire curve

    Change in quantity demanded = shift along the demand curve because of price change
  4. Draw a graph that shows the supply and demand for a service. Label the axis, supply curve, demand curve, equilibrium price and quantity.

    Show the effects of establishing a limit on quantity. What is the loss of social welfare? How much loss is born by consumers? How much by Suppliers?
  5. Draw a graph that shows a consumer's indifference map and budget constraint. At which point will the consumer want to be at?
  6. Price elasticity of demand
    • measure relationship between a change in price and a change in quantity demanded.
    • elastic if % change in price results in more than % change in quantity demanded
    • inelastic if % change in price results in less than % change in quantity demanded
  7. Cross price elasticity
    measures the percent change in a substitute good or compliment divided by the percent change in the price of the good
  8. Price elasticity of Supply
    measrures the relationship between the change in price and the change in quantity supplied
  9. Income elasticity
    measures the percent change in the demand for a given change in income
  10. Inferior good
    A good for which increase in price of one good leads to a decrease in demand for the other good
  11. Substitutes
    goods for which an increase in the price of one good leads to an increase in the demand for the other good
  12. Compliments
    goods for which a decrease in the price of one good leads to an increase in the demand for the other good
  13. Producer surplus
    amount producers recieve in excess of the amount necessary to induce them to produce the good
  14. Consumer surplus
    value the consumers get froma good but do not have to pay for
  15. Price Ceiling
    the maximum legal that can be charged in the market
  16. Price floor
    minimum legal price that can be charged in the market
  17. What is the principal agent problem? How can it be resolved? What is the "perfect" agent?
    • Principal hires another to perform service on ther behalf and delagte some decision making ability.
    • Fix is to make incentives congruent
    • Perfect agent makes decisions the principal would make if fully informed
  18. Market Structure
    environment within which firms in aparticular market operate

    Industry concentration- % of business done by X number of firms

    Nature of demand- price elasticity of demand curve

    Entry conditions- advantages over new entrants, government rules and regs

    Product differentiation- degree to which consumers view one firms output as a substitute for the other firms output

    Firm integration and diversification- extent to which firms offer one product or many, and the extent to which firms provide their own semiprocessed inputs
  19. Market Conduct
    decisions firms make and the method used to implement these decisions

    Pricing policy- collude, choose to sell small output at high price

    Design of product- differentiate packaging

    Advertising- advertizing changes elasticity of demand

    Research budgets- invest in various amounts of new products
  20. Market performance
    whether outcome enhances welfare and other social goals

    Price and output at the level that would occur with competitive markets

    does conduct reduce the number of jobs or wage rate in the industry?
  21. Oligopoly
    small number of providers, seller large enough to influence the market

    non-price competition, product differentiation and brand loyalty
  22. Monopoly
    single firm serves the market without close substitutes for its products or services
  23. Monopsony
    single payer, just one buyer
  24. Bilateral Monopoly
    one buyer and one seller
  25. Monopolistic Competition
    • many buyers and sellers
    • each firm produces a differentiated product
    • firms can freely enter and exit the industry
  26. Draw a figure that shows profit maximization under perfect competition.
    Label the profit maximizing price and quantity
  27. Draw a figure that shows profit maximization under a monopoly?
    Label the profit maximizing price and quantity
  28. What are the five conditions necessary for competitive markets? provide a health care example where each does not occur.
    • 1. Small size, large number of producers and buyers. Buyer or seller cannot influence price.
    • not occur when hospital is a monopoly in ageographic area

    • 2. Homogeneous product, each product is identical to the product of all others, no differntiation, buyers indifferent
    • not occur in prescription drugs

    • 3. Free mobility of resources, can respond to finacial signals by moving in and out of markets easily
    • not occur in licensure laws as barriers to mobility

    • 4. Perfect knowledge-consumers, resource owners, producers must have perferct knowledge of information about price, costs, wage, sales, and quality
    • not occur when consumers can't judge quality of health care services

    • 5. No externalities-someone not directly involved in the economic action bears a cost or recievs a benifit from the action
    • not occur when increase in vaccinations benifts the community
  29. Technical externalities
    • Production process had indivisablilities, results in increasing returns to scale and monopolies
    • ex. potential cost saving techniques may not be researched if the cost of research is born by a single entity
  30. Public good externalities
    • One person's consumption of a good does not reduce another person's consumption
    • ex. public health measures, sanitation
  31. Ownership externalities
    • an owner does not incur all the benifits or costs associated with their property
    • ex. factory makes smog that causes lung cancer
  32. What are the three conditions necessary for monoploistic competition?
    many buyers and sellerseach firm produces a differentiated productfirms can freely enter and exit the industry
  33. What are the necessary conditions for a monopsonist to be able to force a discount from a provider?
    Hospital would be worse off with lower volumes than with discounted charges

    Insurer must be able to make a credible threat to move patients

    hospital must be unable to replace patients
  34. Draw a graph that shows the dead weight loss monopoly
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