Economics Demand Concepts Quiz

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Questions and Answers

What is the concept of diminishing marginal utility primarily concerned with?

The demand curve illustrating optimal consumption

The relationship between goods and consumer income

The change in consumer satisfaction as they consume more of a good (correct)

The budget constraint faced by consumers when making purchases

Which equation describes the affordability of a consumption bundle for a consumer?

$p_1 x_1 + p_2 x_2 ≥ m$

$p_1 x_1 - p_2 x_2 ≤ m$

$p_1 x_1 + p_2 x_2 ≤ m$ (correct)

$p_1 x_1 + p_2 x_2 = m$

What type of demand considers income to remain constant when analyzing the effects of price changes?

Elastic demand

Inelastic demand

Marshallian demand (correct)

Giffen demand

What effect does an increase in the price of good j have on the demand for a substitute good i?

It increases the demand for good i Signup and view all the answers

In the context of a demand curve, a movement along the curve signifies what?

A change in the quantity demanded as the price of the same good changes Signup and view all the answers

How does the demand curve for complementary goods behave when the price of good j decreases?

The demand curve for good i shifts rightward Signup and view all the answers

Which of the following accurately describes the shape of a typical demand curve?

Downward sloping from left to right Signup and view all the answers

What does the consumer's budget constraint illustrate?

The trade-off between different goods given limited resources Signup and view all the answers

What fundamentally distinguishes equity from equality?

Equity considers individual needs, whereas equality is based purely on equal division. Signup and view all the answers

Which type of information is NOT required for assessing distributional equity?

A budget constraint for distribution. Signup and view all the answers

Under the principle of 'allocation according to need,' which individual characteristic is most relevant?

Health care needs of individuals. Signup and view all the answers

What is procedural equity primarily concerned with?

The method used to distribute resources fairly. Signup and view all the answers

What can influence a desire for an unequal distribution of goods?

Disparities in individual health care needs. Signup and view all the answers

What did McKeown argue was the primary cause of health improvements?

Economic growth and improved diet Signup and view all the answers

Which of the following best describes procedural equity?

Concerns the process and fairness in distribution mechanisms. Signup and view all the answers

Which of the following did McKeown identify as a significant factor contributing to health improvements?

Improved nutrition Signup and view all the answers

How do equity and efficiency relate in distribution?

They can be evaluated together without conflict. Signup and view all the answers

Which factor is NOT important when considering distributional equity in healthcare?

Total population size. Signup and view all the answers

What evidence did Robert Fogel provide to support his argument on nutrition and health?

Average caloric intake and average heights Signup and view all the answers

According to McKeown, what was an unintended consequence of economic development?

Improved health Signup and view all the answers

Based on Fogel's findings, what percentage of mortality reduction in the twentieth century did he attribute to improved nutrition?

Half Signup and view all the answers

What has subsequent research suggested was the major driver of health improvements after 1870?

Public health initiatives Signup and view all the answers

Which of the following factors did McKeown eliminate as a possible explanation for health improvements?

Decline in virulence of micro-organisms Signup and view all the answers

What was a major conclusion drawn from McKeown's analysis of historical death rates?

Mortality rates for common diseases fell before medical treatments were available. Signup and view all the answers

What percentage of the increase in life expectancy between 1960 and 2000 is attributed to the decrease in cardiovascular mortality?

70% Signup and view all the answers

Which factor is largely credited for the reduction in cardiovascular mortality since 1960?

Medical progress Signup and view all the answers

What is estimated to account for 20 percent of the increase in life expectancy between 1960 and 2000?

Decreases in neonatal mortality Signup and view all the answers

Which of the following was NOT mentioned as a force that influenced life expectancy from 1750 onwards?

Technological advancements in agriculture Signup and view all the answers

What primary factor contributed to life expectancy declines after the fall of the USSR?

Alcohol consumption and social disruption Signup and view all the answers

What concept explains the observed increase in working-class white morbidity and mortality in the USA?

Lifestyle-related diseases Signup and view all the answers

What two factors are suggested to contribute to the 'Cuban Health Paradox'?

Education and integrated primary health care Signup and view all the answers

What is the significance of understanding determinants of population health for health policy today?

It helps in designing better healthcare systems. Signup and view all the answers

What does the potential Pareto Criterion dictate regarding efficient allocations?

It mandates that efficient allocations maximize total net benefits. Signup and view all the answers

How do social welfare functions (SWF) help in economic analysis?

They assist in identifying preferred allocations within the utility possibilities frontier. Signup and view all the answers

What is a critical assumption for market outcomes to be considered efficient?

Well-functioning market conditions. Signup and view all the answers

Which factor influences individuals' willingness to trade off health for equity?

The importance of the good being distributed. Signup and view all the answers

What does evidence suggest about people's preferences regarding health distribution?

Individuals are willing to accept reductions in total health for fairer distribution. Signup and view all the answers

Which of the following statements about estimating social welfare functions is true?

They are rarely used due to their theoretical nature. Signup and view all the answers

What does the efficiency of a market depend on?

The assumption that the market is functioning well. Signup and view all the answers

What is the overarching theme of economics as presented in the content?

The allocation of scarce resources among competing uses. Signup and view all the answers

What is the main implication of being on the Grand Utility Possibility Frontier (GUPF)?

It ensures that no one can be made better off without making someone else worse off. Signup and view all the answers

Which criterion suggests that reallocations are efficient if winners could compensate losers?

Potential Pareto Criterion Signup and view all the answers

What is a common limitation of the Pareto Criterion in public policy analysis?

It does not identify a unique allocation of resources. Signup and view all the answers

How do economists typically evaluate the equity of resource allocations?

By analyzing the distribution of goods among all agents. Signup and view all the answers

What does the concept of fairness imply in the context of resource allocation?

No single agent should possess all resources. Signup and view all the answers

What is the relationship between the Grand Utility Possibility Frontier (GUPF) and the Utility Possibility Frontier (UPF)?

The GUPF is formed by plotting a single point for each point on the PPF. Signup and view all the answers

Which of the following statements regarding public policies and the Pareto test is true?

Few public policies achieve outcomes that meet the Pareto test criteria. Signup and view all the answers

What does the concept of net benefits encompass in resource allocation discussions?

Total benefits gained from allocation minus production costs. Signup and view all the answers

Study Notes

Introduction to Health Economics

Health economics is a growing field of applied microeconomics
It studies the determinants of health and allocation of resources within the health system.
There are many questions health economists ask, including how health is valued, what economic factors influence health (besides healthcare), what influences the supply and demand for healthcare, how to pay healthcare providers and how to finance healthcare.

Individual-Level Demand for and Production of Health

Objective health: assesses health against a standardized criteria by a third party
Objective measures are: mortality, blood sugar levels, blood pressure, vision score, degree of swelling in arthritic joints.
Subjective health: assessed by the individual-
Subjective measures are: self-rated pain, self-assessed health status, daily living activities
Individuals play an important role in health production.
Time is important due to decisions today affecting future health.
Social forces affect health, such as education and income distribution.
Health is considered as a stock variable that changes over time.

Measures of Health

Mortality-based: Individual-level mortality (dead or alive). Population-level: Crude mortality rate (number of deaths per year per 1000 people), Infant mortality rate (number of deaths in children under 1 year of age per 1000 live births), Life expectancy at birth (number of years), Potential life-years lost (number of years of life lost due to premature mortality). Standardized mortality rate (ratio of actual number of deaths observed in a population to the expected number).
Morbidity-based: Presence/absence of a health condition (e.g., heart disease, diabetes); Body-Mass index (BMI); self-assessed health status (excellent, very good, good, fair, poor); Prevalence/Incidence of a specific health condition; Mean value of a measure (e.g., mean BMI).

The Grossman Health Capital Model

Health is viewed as a stock variable that changes over time.
Health is a durable capital stock producing healthy time in each period
Individuals invest in health to increase their stock of health capital to generate more healthy time and higher utility
The model accounts for the depreciation of health capital due to aging
The depreciation rate of health capital increases with age.

Assumptions of the Grossman Model

Each individual is born with a stock of health capital.
Individuals' decisions impact their health capital over time.
Healthy time can be used for work or combined with market goods (e.g., medical care) to produce health investments or final consumption goods.
Time is a constraint: 24 hours a day and 365 days a year
Income is a constraint: expenditure on healthcare cannot exceed income

Health Production Function

The health production function can be written at the individual level—which is hard to estimate in practice.
Hard/impossible to measure all variables affecting health
Correlation vs. Causality
Factors such as income, education, and community factors can affect health.

Further Assumptions of the Grossman Model

Health production constraint: Health investments using health care and time.
Goods production constraint: Final consumption goods and activities can be produced using combinations of market goods and time.
Constant Returns to Scale (CRTS) in production (doubling inputs doubles output) and no joint production (each input affects one output).
Depreciation rate of health capital: the proportion of health capital that diminishes each period, increasing with age

Optimal Investment in Health

Optimal level of health capital and investments must satisfy an optimality condition.
The marginal benefit of an additional unit of health capital/investment equals the marginal cost of an additional unit.
Benefits of additional health accrue over the years therefore the relevant quantity is the discounted stream of current and future benefits of health.

Optimal Health Capital Trajectory

Each person has an optimal level of health capital at each point in life.
The optimal consumption amounts are not a point but a trajectory in time (x1 (t), x2 (t)) where t is every instant in a person's lifetime.

Grossman's Consumption and Investment Models

Consumption model: health affects utility indirectly through an increase in healthy time. Only reason to work in this model is to maximize consumption. No direct utility effects of health.
Investment model: health affects utility indirectly through an increase in healthy time.

Summary of Grossman Model Predictions

Aging → decreases demand for health and health care
Increase in wage rate → increases demand for health and health care
Increase in education → increases demand for health and health care
Consumption demand → demand for health is inelastic, demand for health care depends on a person's rate of time preference.

Assessment of the Grossman Model

No uncertainty about health/anything else. Predictions generally remain consistent when uncertainty is introduced; usually leads to higher demand for health
Can have strange results with CRTS.

Education and Health

Important questions: Causality vs. spurious correlation, Direction of causation, and Mechanism of causation
Role of time preferences, discount factor, problem: difficult to measure.
Impact of health on education: Health in early life affects educational attainment; poor health in childhood is associated with poor health in adulthood.

Morbidity and mortality associated with obesity, smoking, unsafe sex, alcohol and illicit drug use, lack of exercise and poor diet
Problems with modeling such behaviors(i.e., elements of addiction, time preferences and probabilistic nature of negative consequences).

Economics of Obesity

Obesity is measured using BMI
Obesity rates are on the rise in Canada and the OECD.

Chapter 6 The Determinants of Population Health

This chapter looks at broader, non-individual determinants of level and distribution of population health.
Examples of these include purity of air and water, design of transportation, safety of workplaces, and the availability of places to meet and play.
Unequal exposure to health risks, social health-enhancing features of the physical and social environment generates systematic inequalities in health distribution
Policy usually seeks to increase/raise average level of health while reducing such inequalities.

Broader Determinants

Observed ill health derives from complex interactions between biology, behavior, and environment
Economic policy problem is to identify nature of underlying production function and how factors produce health and act alone/in combination.
By manipulating physical and social environments, policy aims to give people resources to respond to health challenges.

Figure 6.10: A framework for understanding the determinants of health (Evans and Stoddart, 1990)

A framework for understanding the determinants of health
Shows the interaction between social environment, physical environment, genetic endowment, individual response, health and function, disease, and health care leading to well-being.

Figure 6.1: Life expectancy in England and Wales (1750 - 2000)

Shows life expectancy trends over time, with distinct periods of increase.

Thomas McKeown's 2 Theses

Thesis 1: Medicine was not primarily responsible for the historical improvement in health in England and Wales.
Thesis 2: Economic growth, rising living standards, and the accompanying improvements in diet were the primary sources of improvements in health.

McKeown-Thesis 1

McKeown presented a series of graphs for death rates from leading causes of death.
Shown conclusively that clinical medicine could not possibly have been responsible for historical improvements in health.
There were rapid falling rates of mortality for common diseases well before effective medical treatments became available.
Canadian data shows a similar pattern.

McKeown-Thesis 2

McKeown argued that the major cause of improved health was a general improvement in living standards, particularly diet, associated with economic development.
Improved health was an unintended by-product of economic development
Direct evidence of improved nutrition's impact on health was not explicitly provided.
Possible explanations that were eliminated: decline in virulence of micro-organisms, reduced exposure and improved treatment of potentially harmful organisms.

Robert Fogel on Nutrition

Direct empirical evidence for the effect of improved nutrition.
Fogel demonstrated average caloric intake substantially increasing in the middle of the eighteenth century, which was associated with increased average heights.
Most of mortality reduction between the eighteenth and the late nineteenth centuries was attributed to improved nutrition, and almost half of the reduction during the twentieth century
Some analyses have challenged the thesis that better nutrition caused the decline in mortality rates.

Public Health

For the period following 1870, subsequent research argues that the driver for health improvement was not economic growth or nutrition but deliberate social policy initiatives.
Squalor of cities in the industrial revolution, germ theory to explain disease transmission gave rise to modern public health movement.
Movement emphasized three types of action: Improved housing and workplaces, public investment in infrastructure, and public health education.
Examples such as water purification in American cities contributed to mortality reductions.

Samuel Preston's Curves

Provides multi-country analysis of the relationship between life expectancy and income.
Shows life expectancy rises with income per capita in a highly curvilinear way.
Shows that an upward shift is not consistent with explanations based on economic growth.
Shows that levels of health achieved by low-income countries are highly variable.

Rise of Medicine

The start of modern medicine is generally dated from the introduction of antibiotics in the 1930's.
The impact of medicine on health has been small in the historical context, but substantial since the middle of the twentieth century.
Cutler (2004) attempted to quantify the impact of advances in modern medicine on population health since the early 1950s. Focused on cardiovascular disease and neonatal mortality.

Modern Medicine

Between 1960 and 2000, cardiovascular mortality fell by over 50 percent.
Cutler (2004) attributes up to two-thirds of the decrease in cardiovascular mortality to medical progress (the balance is due to other factors).
Decreases in infant mortality account for an additional 20% of the increase in life expectancy.

Summarizing the causes of increased life expectancy

Three major forces influenced life expectancy increase since 1750:
- Economic growth (raising living standards and improved nutrition)
- Public health and related initiatives
- Modern Medicine (especially since 1940)

Lessons for Improving Population health Today

The modern record shows that continuous improvement in health is not automatic.
There are examples of life expectancy declines in particular situations after periods of change.
Examples such as education and primary healthcare programs.
Examples from regions following the fall of the USSR

Implications for Health Policy Today

Understanding determinants of population health has important implications for health policy today.
We must ask hard questions about how best to invest new resources.
Some argue that medicine is currently at the "flat of the curve" in the production function, and additional health care spending may only yield small gains in health.
The Canadian government's seminal Lalonde Report (1974) suggested emphasizing the importance of the broad range of determinants of health.

Health Inequalities

Research on determinants of health emphasizes both level and distribution of health in a population.
Aspects of unequal distributions of health is the social gradient in health.
This gradient is related to socioeconomic status.
Chronic disease and disability are examples of specific health concerns in this context.

Whitehead Study

The Whitehall Study has followed the health status of thousands of British civil servants over many years.
Important because it rules out two common hypothesized causes: absolute deprivation and social interaction.
Shows that the gradient in social class differences extend to administrative levels of the British civil service.

Health Behaviours

Differential prevalence of high-risk health behaviours across the ranks does not cause the gradient.
Lowest rank has a higher prevalence of certain risk factors.
Education and income are thought to contribute causally to health status.

Research on the social determinants of health offers some tentative explanations.
Draws on research into social hierarchies in primates, the stresses associated with such positions, and the health consequences.
Stress response, and the varying frequency and severity of stress by rank in the hierarchy can manifest in disease.

Supply and Demand (part 1)

Supply and demand interact, leading to equilibrium prices in markets or "Marshall's Scissors".
Below equilibrium price → excess demand
Above equilibrium price → excess supply

Supply and Demand (part 2)

Supply and demand framework can show impact of market-affecting events.
Example: Outbreak of "Mad Cow" disease—impacts on the market for burgers, demand and supply curves shift left, and equilibrium effects.

Supply and Demand (part 3)

Supply and demand analysis of markets can trace impact of market-affecting event
Example: Outbreak of "Mad Cow" disease—impacts on the market for pizza; demand curve shifts right, supply curve is unaffected, equilibrium effects.
Effect of reduction in supply on equilibrium price and quantity with demand of varying elasticities

Normative Economic Analysis

Assumptions for economic analysis: Consumer sovereignty, Welfare of a society depends on the set of individual well-beings of members of that society.
Major Conclusion: For processes of market competition given consumer sovereignty, perfect competition, a large number of consumers/producers, and no externalities in consumption or production

Consumers' and Producers' Surplus

Measures the benefit/gains to consumers and producers.
Consumers' surplus: the difference between what consumers are willing to pay and what they actually pay.
Producers' surplus: the difference between what producers receive and their costs. Profit to society occurs when these two sums are added together

Shows that net benefit is maximized at the equilibrium point.

In a Perfectly Competitive Market, No Unit has Market Power

No producer or consumer has significant control over market prices; market forces determine the prices.
Consumers and producers are insignificant compared to the total market

Markets with Imperfect Competition 1

Some competition exists, but with some market power.
Examples include monopolistic competition characterized by many producers each selling a slightly differentiated version of a product, but the goods are substitutes.

Markets with Imperfect Competition 2

Examples include Oligopolistic competition characterized by few large producers, such as the competition among brand-name drugs for a medical condition, petrol providers, and where strategic interactions among firms matter.

Monopoly and Monopsony

Monopoly: A single seller, often due to factors such as patents.
Monopsony: A single buyer, such as a single employer in a small town where they have the power to hire workers.

The Welfare Effects of Monopoly 1

Monopoly Equilibrium: Higher Price (PM), Lower Quantity (QM), than Competitive Equilibrium at point C (Price Pc, Quantity Qc).
At the monopoly output level (QM): PM=MB=MSB > MPC=MSC.
This implies that the firm does not produce one more unit of output because increasing output would lower price relative to increased cost.

The Welfare Effects of Monopoly 2

Shows that a monopoly creates a welfare loss due to underproduction compared to the competitive market.

No Externalities

Whenever the private costs (or benefits) of an activity differ from the social costs (or benefits), an externality arises.
Production Externality: A firm’s private cost is lower than the social cost because the cost is not paid by the firm (ex. firms generating pollution).
Consumption Externality: Consumer(s) generate positive and/or negative externalities (ex. vaccinations, secondhand smoke)

The Welfare Effects of Externalities

Shows that externalities lead to inefficiencies in allocation.

Information

Supply side: All producers must have access to information on production methods for the good, and the prices of production inputs.
Demand side: Consumers should know the quality of the good, their own valuation for the good, and the prices charged by producers
Concerns for asymmetry of information between buyers and sellers.

Information Problems - Example

Perceived private benefits are lower than true private benefits.

Markets and Market Failure

In perfectly competitive markets, MSB=MPB=P*=MPC=MSC.
The net social benefit of producing a good is the total social benefit minus the total social cost
Thus a perfectly competitive market also maximizes net social benefit

2 Rationales for Government Intervention

Market failure rationale: When one or more of the conditions for perfectly functioning markets is violated, an unregulated market may fail to generate a Pareto efficient allocation (so intervention may be necessary).
Intervention to “correct” market failure may be needed.
Must often choose among the second-best alternatives, as no feasible alternative is as efficient as perfectly functioning markets

Willingness to Pay

Markets allocate resources based on consumers' willingness to pay (WTP).
A person's WTP depends partly on their preferences and partly on their income or wealth.
Markets produce Pareto Optimal allocation if they're well-functioning.
Final allocation could be considered equitable if the initial distribution of resources was equitable.

Efficiency vs Equity

First Fundamental Theorem of Welfare Economics: In competitive markets, the market mechanism leads to Pareto-efficient allocations.
Second Fundamental Theorem of Welfare Economics: In competitive markets, any Pareto-efficient allocation can be implemented via market mechanism with redistribution of wealth. Allocation may not be equitable even if markets are competitive.

Market Failure Rationale vs Equity Rationale

Efficiency-based arguments carry more weight within most areas of economics.
Equity is a more contested notion than efficiency.

The Basics of Markets (part 1)

Markets ensure efficient allocation of resources, a result of the market mechanism
Competitive markets are an allocation mechanism, where forces of competition in supply and demand determine prices.
Producers and consumers take these prices as given—how much to produce (supply) and how much to buy (demand).
In some cases (healthcare markets) the conditions for efficiency may not be met

Demand Side—Consumer Behavior

Two key factors determining consumer behavior: Preferences and Budget Constraint
Objective of the consumer: Choose the affordable consumption bundle that gives the highest utility, given preferences, income, and prices.

Preferences are Summarized by a Utility Function

Utility function summarizes preferences. Examples including linear utility functions(U(x1,x2) = 2X1 + 3x2).
Marginal Utility: How much utility changes when a good is increased by a small amount. Diminishing Marginal Utility: Additional satisfaction becomes smaller as consumption increases.

Consumer Behavior—Budget Constraint

What goods can a consumer afford given their resources (money) and market prices?
A consumption bundle (x1, x2) is affordable if p1x1 + p2x2 ≤ m.

Indifference Curves and Budget Constraint - 1 Individual

Shows how consumers choose an optimal mix of goods given their budget and preferences, represented by indifference curves.

The Demand Function and Movements Along It

The demand function (or demand curve) shows the relationship between price and quantity demanded, holding all else constant (except price).
The relationship is usually negative.

Shifts in Demand Curves - Substitute Goods

The demand curve shifts right if the price of a substitute good increases, and shifts left if it decreases.

Shifts in Demand Curves - Complementary Goods

The demand curve shifts right if the price of a complementary good decreases. The demand curve shifts left if it increases.

Elasticity of Demand

Measures sensitivity of demand to changes in its determinants. Including price and income

A Demand Curve for Medicine

Shows price and the quantity demanded at different prices. The demand curve is downward sloping.

Measures of Price Elasticity of Demand

How responsive quantity demanded is to a price change. Ep= %ΔQuantity/%ΔPrice.
Elastic demand → Ep > 1 → a change in price results in a larger proportionate change in quantity demanded.
Inelastic demand → Ep < 1 → a change in price results in a smaller proportionate change in quantity demanded.
Unitary elasticity of demand → Ep = 1

Shifts in Demand Curves—Changes in Income

Shifts in demand curves arise from changes in income.
The shift is to the right if demand increases from higher income and left if it decreases from lower income.
The type of good will influence whether demand shifts in or out. Examples such as luxury/necessity goods.

Movements Along and Shift in a Demand Curve

Movement along demand curve occurs when price changes.
Shift in demand curve occurs with a change in income.
Shift in demand curve results in differences in quantity demanded at prevailing prices.

Income Elasticity of Demand

Measures the responsiveness of quantity demanded for a good to changes in income. Ey= %ΔQuantity Demanded/%ΔIncome.
Normal goods → Ey > 0 → demand increases when income increases.
Inferior goods→ Ey < 0 → demand decreases when income increases.
Luxury/superior goods—demand increases more profoundly than income when income rises.

Clarifying Some Text Book Errors and Omissions on Elasticity of Demand Table 3.3

Some clarifications for own-price elasticity of demand.
Some clarifications for income elasticity of demand.

From Individual to Market Demand 1

The market demand for a good is obtained by aggregating demands of all consumers at various prices.
The market demand is affected by both average income and the distribution of income.

From Individual to Market Demand 2

The market demand curve is the sum of individual-level demands.
The market demand affected by average income and income distribution.

The Production Function

Production transforms inputs into outputs with given technology.
The technology summarized by a production function y = f(x1, x2,...xn).

Firm Behavior—Supply Side

Firms aim to maximize profits given technology and production function.
Diminishing Marginal Product: Increasing one input results in increasing total output but at a decreasing rate.

Firm Behavior—Average Product

Marginal product: the change in total output resulting from a unit change in input.
Average product: the total output divided by the number of units of input.
Interpretation: the average product of a unit of input given holding other inputs constant.

Marginal Costs of Hamburger Production

Account for input prices.
E.g., Marginal Cost of producing 1 more hamburger: the cost of inputs
When we hire a worker to produce 50 hamburgers, the marginal cost of each of these extra burgers is (total cost)/ (total units).
Eventually marginal cost becomes very large as the last bit of output is squeezed from current stock of capital.

Marginal Revenues

Competitive firms consider output prices as given and marginal revenue is equal to the market price, p

Profit–Maximizing Output

Profit maximization is achieved when marginal revenue (p) equals marginal cost.

Firm Supply

Profit maximization occurs when marginal cost equals per-unit price of output
Profit-maximizing level of output must be such that marginal cost (MC(y*)) equals marginal revenue (p(y*)).

Individual Firm (Short-Run) Supply Curve for Hamburgers

Shows a firm's supply curve, representing how quantity supplied changes with price, holding input prices and technology constant.

Summarizing the Individual Supply Curve

• Depicts how production changes as prices change. • Upward sloping (higher price → greater output) • Shifts due to changes in technology, production cost, regulations, etc.

Movements Along and a Shift in the Supply Curve

A shift along the supply curve occurs when prices change, impacting the quantity supplied at different price points
A shift in the supply curve occurs due to changes in the technology of production or input prices (which can either decrease/increase the price of a commodity thus shifting the supply curve to the left/right respectively)

Shifts in the Supply Curve—Example

Illustrates shifts in the supply curve in response to changes in worker or technology cost.

Market Supply

The market supply curve is the horizontal sum of individual firm supply curves for each price level.

What is Economics

Branch of knowledge concerned with the production, distribution and consumption of goods and services.
Concerned with allocation of scarce resources via concepts of consumer sovereignty and market processes.
Economists use these concepts to analyze and formulate various possible solutions.

Resources and Opportunity Cost

Society allocates scarce resources among competing uses
Opportunity cost is the highest value of an alternative that must be forgone when a particular choice is made.
Resources should never be used in a way that opportunity cost is higher than benefit

Money

Money is not a resource—it's a metric value for resources.
Prices link resources to money.
Prices reflect marginal benefits and opportunity costs
Used to optimize choices using marginal analysis

Marginal Analysis

Involves examining the incremental benefits and costs of small changes to a decision to determine which outcome maximizes overall gain.
Optimal level is found when marginal benefit is equal to marginal cost. Example of optimal number of beds in a hospital

Marginal Analysis Example - Colon Cancer Screening

Analyzes marginal costs and benefits of additional colon cancer tests on an individual basis.
Focuses on evaluating the optimal number of tests (in this example, 6) in the context of marginal costs and benefits.
Also includes factors like test effectiveness and potential for errors (false positives and negatives).

Marginal Analysis and Screening for Colon Cancer (part 2)

Detailed analysis of the costs and benefits associated with a health screening program including detailed costs of testing in each round and probability of correctly identifying cases.
Analysis assesses the marginal cost per case detected with each additional test, concluding that the marginal cost per case of the sixth test is high compared to other tests.

Production. Technology and the Production Function

Production transforms inputs into outputs given by a production function.
Y = f(x1, x2,...xn).

There are usually many different ways to produce a given output

Illustrates that there are many ways to produce the same amount of a particular output (in terms of hours worked)
Which of these are most feasible (considering efficiency implications)?
Examples from health care.

Technical Efficiency

Technical Efficiency: No resources are wasted in production (given a set level of output to be produced)

The Production Possibilities Frontier (PPF)

Illustrates all combinations of two goods/outputs that can be produced with current resources and technology for a specific timeframe.
Any point on the curve is technically efficient.
Points inside the curve represent underproduction, those outside are not feasible with current technology.

Pareto/Allocative Efficiency 1

Defines Pareto efficiency/optimality.
Allocation is Pareto optimal if no one can be made better off without making someone else worse off.
Conditions: (1) At least one person prefers the new allocation (2) No person is worse off in the new allocation
Pareto efficient allocations are a subset of productively efficient allocations.

Pareto/Allocative Efficiency 2

Allocative efficiency requires that goods/services are produced and distributed according with the value people place on them.

Utility Functions

Utility functions represent individual preferences over goods and services but do not need to be interpersonally comparable.
A utility function is ordinal.

Indifference Curves and Budget Constraint - 1 Individual

Shows different combinations that give same utility level.

Exchange Efficiency 1

An illustration of the production possibility frontier(PPF) for two outputs(goods).
Example relating to allocation of housing and food.
All allocations are Pareto efficient by definition.

2 or More Individuals

The various allocations among two or more individuals, given the production possibility frontier (PPF):
Determining allocatively efficient combinations of food and housing.
Show that the horizontal axis represents total amount of housing and the vertical axis represents total amount of food given.
Illustrates indifference curves showing various levels of utility combinations for outputs(goods)

UPF and GUPF 1

Measures utility possibilities from all possible allocations of given total production of goods
The set of all allocations on the contract curve (i.e., different ways of distributing the goods/outputs between individuals).
Can be converted into UFP, which measures the maximal utility when food and housing are produced at point F on the PPF (production possibility frontier).

UPF and GUPF 2

Shows utility possibilities frontier for the PPF and grand utility frontier, illustrating various combinations of utilities under different constraints for a particular point on a production possibilities frontier.

UPF and GUPF 3

Discusses efficiency in production, exchange, and harmony between those two elements.
All points on the GUPF are Pareto efficient.
The GUPF represents maximum possible utilitarian gains possible with the given total output.

Potential Pareto Criterion

• An allocation is potentially Pareto-efficient if any reallocation that would make another individual better-off would require making another individual worse-off

Equity

Equity concerns fairness.
In some situations allocations where one of the agents gets all of the goods in the economy may not be considered fair.

Distributional Equity

Evaluating equitable distributions of a good/service.
Evaluating the characteristic(s) for assessing equitable distribution of a good/service.
Health care, health care itself, access to care and the burden of paying for health care.

Procedural Equity

Procedural equity concerns the process of distribution (e.g., ensuring all are treated equally regardless of class, ethnicity, etc.).

Equity and Efficiency

Equity and efficiency are two separate problems that do not necessarily conflict.
An allocation can be efficient while not considered equitable, and it can be equitable while not efficient.
Economists have little consensus on equity's definition compared to the definition of efficiency.

SWF

Social Welfare Function (SWF) defines desired allocation of resources.
SWF identifies most-preferred allocation on GUPF- it's challenging to calculate empirically but is very important in analyzing policy.
Example illustrating utilitarian and inequality-averse SWFs.

Markets

States that so far, no assumptions have been made about markets, which could be divided equally, letting consumers trade freely—would market outcomes be considered efficient and equitable?
Markets are efficient under the common assumption of well-functioning markets.
More detailed analysis of assumptions of well-functioning markets will be presented in the next chapter.

Chapter 1 - Health and Health Care Systems

Briefly introduces the concept of health economics and asks key questions regarding the valued, economic factors that influence health factors, and health care costs and expenditures.

General GDP, GNP, GNI

GDP: Total market value of officially recorded final goods and services in a country in a given period
GNP: Total market value of final goods and services by citizens (of a certain country) in a given period, domestically and abroad
GNI: Total income of citizens in a given period, including domestic and net primary income from abroad.
GDP,GNP, GNI can be roughly related by GNP = GNI = GDP + net income from the rest of the world.
Important to note that while these terms appear almost similar, they differ in terms of value generation implications

Inflation & Purchasing Power Parity (PPP)

Inflation: A persistent rise in the price of goods, services, and factors of production
PPPs: Rates of currency conversion accounting for price levels in different countries, important in relative comparisons.

Health Care Expenditures/Cost

Total healthcare expenditures=Public+Private Expenditure
Private Expenditure=Out-of-pocket+Insurance Payment
Total health spending in Canada is expected to reach $331 billion or $8,563 per Canadian in 2022
Health expenditure has been rising at a faster rate than GDP in Canada.

Health-Care Costs/Expenditure

High health spending is not inherently bad. Relevant to assess cost-effective use of resources, while not excluding benefit assessment
Must also consider general improvements in health outcomes, technologies used and new improvements compared to older ones that could be more expensive overall.

Breakdown of where health expenditures are spent in Canada (2022).
Examples are Administration, hospitals, physicians, drugs, home and community care, and Covid-19.

Total Health Expenditure and GDP, Annual Growth Rates, Canada (2002-2026)

Analysis of the relationship between total health expenditure growth and GDP growth. In almost all cases, annual growth rate of health expenditure outpaces the rate of GDP growth during the period examined. This could potentially imply that the cost of maintaining health is increasing faster than relative gains in income for individuals or countries.

Five distinct periods of growth in Canada’s health spending

Overview chart showing five distinct periods of growth in total health expenditure.

How do Provinces and Territories Compare

Mapping of per capita health care expenditure for provinces and territories in Canada.

2020 Health Spending CAD per capita

Bar chart presenting average comparisons of health spending CAD per capita for certain countries across the OECD.

2021 Health Spending CAD per capita

Bar chart comparing per capita health expenditure for several countries across the OECD with Canada represented.

2020 Health Spending as a Percentage of GDP

Total health expenditure as a percentage of GDP for several OECD countries in 2020 including Canada.

2021 Health Spending as a Percentage of GDP

Total health expenditure as a percentage of GDP for several OECD countries in 2021 including Canada

2020 Public/Private Split

Breakdown of sources for health care spending in 2020 including Canada.

2021 Public/Private Split

Breakdown of the sources for healthcare spending in 2021, including Canada (public and private sector spending)

Canada-Life Expectancy and Infant Mortality

Line chart showing Canada's life expectancy and infant mortality rates.

Life Expectancy at Birth, by Sex in 2020

A line chart showing life expectancy at birth by sex for several OECD countries in 2020.

Infant Mortality Rates in 2020

Bar chart showing infant mortality rates for various OECD countries in 2020.

Life Expectancy at Age 30 by Sex and Educational Level

Analyzes life expectancy at age 30 based on sex and educational level for various OECD countries and displays disparity
Countries' life expectancies at age 30 vary by educational level and sex

Canada's Health Spending and Life Expectancy

A comparison of Canada's health spending as a percentage of GDP and life expectancy compared to other OECD countries.
Data includes countries that spend less on health but have higher life expectancy than Canada

Charts comparing Canada's health spending (in CAD PPP) and life expectancy at birth to OECD averages.

Health Spending and GDP Growth Varied

Graph showing health spending and GDP growth in Canada compared to average OECD growth from 2002 to 2022.

International Comparisons: Fast Facts

Canada's health spending and life expectancy is among the highest in the OECD.
Relative ranking including the United States.
The share of health spending financed by the public sector is comparable to the OECD average, with the United States being considerably lower.

Governance

The set of institutions that govern the health care system, national principles for financing and delivery of services are detailed in the CHA
Provincial responsibilities

Canada Health Act

Defines criteria for provincial programs in the CHA, encompassing universality, comprehensiveness, portability and accessibility for all eligible citizens in the healthcare delivery system (including funding).

Does Canada have a single national health care system

Canada does NOT have a single national health system; 13 provincial and territorial governments oversee their respective health care plans within a national framework.
Federal government sets national standards and provides funding (Canada Health Transfer)

Level of Centralization

Health care system in Canada is highly decentralized due to provincial/territorial responsibilities for funding and delivery, physician status as independent contractors, and multitude of organizations operating at arm's length from provincial governments.
Examples are regional health authorities (RHAs).

Delivering Health Care

Although 75% of health care is publicly financed, most delivery systems are private.
The physician sector is a key part of the system where physician practices(FFS) is dominant with a few examples of capitation and salary payment models.
Hospitals and long-term care are also mainly privately-run.

Desirability of Centralization

Factors influencing the level of decentralization in health care systems include variation across regions, the nature of the population's health needs, the best ways to meet those needs, the nature, and distribution of information required to plan. The easier it is to attain centralized governance the more plausible a case for more centralized governance becomes.

Health Care Financing

Public financing in Canada covers medically-necessary hospital/physician services.
Provincial governments are the largest funding source and provincial governments raise the majority of funds through their own sources (taxes, etc). These funds are substantially less than a quarter of their general health sector financing (which stems from the Canada Health Transfer (CHT)), an annual cash contribution from the federal government.
Private financing: private insurance, out-of-pocket spending, insurance cost-sharing

Provincial Financing

Provincial and territorial governments provide healthcare goods and services that go beyond the universal basket of hospital and physician services.
Examples: prescription drug coverage, long-term care and home care.
Cost-sharing may be implemented via user-fees relative to hospital and physician services.

Impact of Insurance on Health Care Markets

Insurance lowers the costs of care to consumers (patients).

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This quiz explores key concepts in economics, focusing on demand theory and consumer behavior. Questions cover topics like diminishing marginal utility, budget constraints, and the effects of price changes on demand for substitutes and complements. Test your understanding of these essential economic principles!