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

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.

Arrow’s Special Characteristics of the Medical Care Market Nature of Demand for Medical Care Expected Behavior of Physicians Product Uncertainty Supply conditions Pricing Practices 1. Demand for medical care is irregular and unpredictable. Demand for medical care is associated with an assault of personal integrity. 2. Product and the activity of production are identical. There is an element of trust between physician and patient. Physician’s behavior is governed by a concern for the patient’s welfare. Physician behavior has a collective-orientation. 3. Uncertainty as to the quality of the product. Special characteristic of this uncertainty, it’s very different on both sides of the transaction specifically in terms of the knowledge of the physician versus the patient. 4. Licensing physicians. Subsidies of tuition of medical students. Standards for licensing and educating physicians likely to disallow standards that would serve public better at lower costs. Why physicians profits exceed profits of other professionals. 5. Are physician pricing practicing due to monoploy power of physicians or are they a non-market structure meant to subsidize those who could not pay for medical care?

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

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?

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

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