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ECON 500 Western Michigan University Perfect Competition Market Model Questions

  • Describe the elements of competitive markets described in our review of microeconomics at the beginning of the course:
    • A sufficient number of buyers and sellers – no single buyer or seller has any significant power over the price.
    • The good is homogeneous – all producers produce the exact same good so that the market cannot be segmented on the basis of difference of goods.
    • All buyers and sellers have equal information on all relevant variables such as prices and qualities.
    • No barriers to entry or exit are present. A producer starts producing, buying necessary machinery, patents, or anything else on terms that are equivalent to those already in the industry.
  • Describe the concept of diminishing marginal utility and give an example
  • Describe some of the ways in which health care differs from that competitive ideal:
    • Fee differences among patients
    • Quality of care
    • Restricting competitive behavior
    • Consumer ignorance
    • Supplier-induced demand
    • Critical mass needed
  • Describe the differences between the supply and demand “curve” we described at the beginning of the course
    • Demand curve – downward sloping to the right, as price increases, quantity demanded decreases.
    • Demand influenced by income, consumer tastes, prices of substitute goods
    • Demand curve downward sloping because of the substitution effect where consumers will substitute other goods to meet a need if the marginal utility of a given good is lower than its marginal cost
    • Change in demand = shift of the demand curve’s position on the price/quantity grid vs. change in quantity demanded = move along the demand curve. Change in demand results from a change in a market factor such as availability/price of substitutes or change in consumer preference. Change in quantity demanded a result of change in price.
    • Supply curve upward sloping to the right, due the higher marginal costs of production at higher levels of output.
  • Describe how the profit maximizing seller determines its level of output – sellers will maximize profit as long as they produce out to the point where marginal revenue = marginal cost. Describe the various cost relationships described in the course –
    • Variable cost
    • Fixed cost
    • Total cost
    • Marginal cost
    • Average variable cost
    • Average fixed cost
    • Average total cost
  • Define the agency relationship between physician and patient and how that can influence demand for health care services. Also write some of the limitations on the assertion that suppliers will induce demand, e.g., the income/leisure trade-off.
  • Differentiate between “moral hazard” and “adverse selection” in health insurance markets and how each could influence the market for health care services.
  • Be able to define the economic evaluation methods described in the course and how they would be used.
  • What are the elements of managed competition and price transparency as alternate means of health care market reform. In particular, be sure to talk about the fact that both attempt to improve the information a consumer has in the health care marketplace. Managed competition essentially attempts to make the price of health care simpler by managing the price the consumer sees as the premium for health insurance under some form of universal coverage. Price transparency instead attempts to improve consumer knowledge of the prices paid to providers for services.
  • Describe the Grossman model of consumer demand for medical care outlined in your text, where the demand for medical care is a derived demand from the consumer’s desire to be healthy and will obtain medical care “inputs” to build up a “stock” of personal health that is used to generate income or use on leisure activity. Personal health stocks depreciate over time, requiring more and more inputs as the consumer ages.


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