Class 7: Summarizing Market Competition, Introducing Demand Theory

1
Class 7 Summarizing Market Competition,
Introducing Demand Theory

• Health Policy Implications Linked to Market
  Competition
• Key Constructs Related to Demand Theory Social
  Welfare, Revealed Preferences, and Consumer
  Surplus

2
Skill Groups meet and discuss

• How will the group govern its effort?
• How will it structure its work? By tasks? By
  organizations involved? By experience with the
  skill area? Others?
• Are there special needs or boundaries within
  which members must work? How might the group
  manage these challenges? An example could be to
  divide the topic and assign work to sub-groups.
• What strategies will be used to gather
  bibliography from journals, books and the
  Internet?
• Give me a 1 or 2 sentence synopsis describing
  where your group is at this point.

3
Arrows Special Characteristics of the Medical
Care Market

• Nature of Demand for Medical Care
• Expected Behavior of Physicians
• Product Uncertainty
• Supply conditions
• Pricing Practices

4
Key constructs associated with Market
competition

• Pareto Optimality
• The Edgeworth box
• Social Welfare as the outcome of market
  competition
• How even rational consumers and producers in a
  real world can interfere with Pareto optimality

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Health policy implications linked to the market
competition model

• Evidence which suggests that social groups avoid
  the competitive model
• Should we start by establishing principles for
  fairness in the allocation of health services?
• How free-rider behavior might kill the best
  feature of HMOs
• Is health education a legitimate health policy?
• Should the control of medical costs be a health
  policy goal?

6
Three Demand theory constructs in classical
economics social welfare, revealed preferences,
and consumer surplus

• The utility that individuals gain from the items
  they buy is a measure of their social welfare
• The actual items individuals buy reveal their
  preferences which are based on the utility they
  expect to gain from those purchases
• Economists observe these revealed preferences to
  measure the Consumer Surplus or added social
  welfare individuals gain when they purchase an
  item

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Six Assumptions That Underlie Classical Economic
Demand Theory

• Person is the best judge of his welfare
• Consumers have sufficient information to make
  good choices
• Consumers know with certainty, the results of
  their consumer decisions
• Individuals are rational
• Individuals reveal their preferences through
  their actions
• Social Welfare is based solely on individual
  utilities, which are based on solely on the goods
  and services consumed