Review of Economic Methodology

1
Review of Economic Methodology
2
Economic Fundamentals

• Optimization
• Marginal Analysis
• Supply and Demand
• Equilibrium

3
What are the likely consequences of the following
events in the U.S market for cosmetic surgery?

• Health insurance coverage is expanded to cover
  all elective procedures, such as tummy tucks,
  nose jobs, and liposuction
• The FDA (Food and Drug Administration) takes all
  silicone-based implants off the market fearing a
  connection with certain connective-tissue
  diseases
• Personal finance companies start a nationwide
  lending program for cosmetic procedures not
  covered by health insurance
• Medical malpractice insurance premiums increase
  for plastic surgeons
• Medical schools announce that residents in
  plastic surgery can be licensed after only five
  years instead of the current seven years

4
Economic Fundamentals

• Optimization
• Marginal Analysis
• Supply and Demand
• Equilibrium
• Elasticity
• Welfare analysis
• Effects of government intervention

5
Suppose the market for lasik eye surgery can be
described by the following equations
Qd 5100 6P Qs - 400 5P

• Solve for the market equilibrium price and
  quantity.
• Calculate consumer and producer surplus.
• Calculate the elasticity of demand at the
  equilibrium.
• Suppose the government imposes an excise tax of
  100 per surgery on eye surgeons. What is the
  new equilibrium price and quantity? What happens
  to social welfare?

6
Economic Fundamentals

• Competitive Markets
• Many buyers/sellers
• Homogeneous product
• No entry barriers
• Perfect information

MC
ATC
AVC
P1
MR1
quantity
q1
7
Imperfections in Medical Markets

• Monopoly
• Restricted entry (AMA, CON)
• EOS
• Externalities
• Communicable diseases/immunizations
• Uninsured and cost shifting
• Public goods
• Free-riders
• RD

8
Imperfections in Medical Markets

• Imperfect information
• Agency problem (induced demand)
• Adverse selection
• Moral hazard
• Third-party payers

Hospitals 3 per 1 Physicians 20 per 1
9
Dealing with Market Failure

• Collective provision
• Medicare
• Medicaid
• Government regulation
• Price controls
• Entry restrictions
• FDA
• Tax Policy
• Tax exemptions

Government Failure?
10
How does the difficulty in acquiring and
understanding medical information affect the
price and quality of medical care? How will
the widespread access to the Internet affect
medical care delivery in the future?