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					RESOURCE ALLOCATION &
    “THE MARKET”
• Demand, supply and the market
• Sources of “failure” in the market for
  health care
• The “insurance” system of funding
  health care
• Resource allocation in the absence of
  the “free” market - for discussion
          DEMAND, SUPPLY
          AND THE MARKET
• 1.   Concept of Demand (“buyers”)
            - demand curve
            - influences on demand
• 2.   Concept of Supply (“sellers”)
            - supply curve
            - influences on supply
• 3.   Concept of the Market (“exchange”)
            - interaction of d+s
            - equilibrium (through price mechanism)
                DEMAND
• Consumers purchase those commodities
  which, subject to their income constraint,
  maximise their utility

• “Demand” =     willingness and ability to pay
                 for a commodity at each and
                 every price, over a given
                 period of time, subject to all
                 else being constant (ceterus
                 paribus)
DEMAND CURVE
  Price
    $




 2



1.50


                  D=MB
                     No. Mars Bars
     0    2   4
         DETERMINANTS OF
             DEMAND

• (Full ) price of the commodity
• Prices of other commodities - compliments
                                 - substitutes
• Consumer income/wealth
• Consumer “tastes” (need?)
INCREASE IN DEMAND

   Price       A ® B caused by fall in price
     $
               A ® C caused by increase in income



           A       C
  2



 1.50              B
                           D1

                       D
                            No. Mars Bars
      0    2   4
“ELASTICITY” OF DEMAND
• Price elasticity = % change in quantity demanded
                          % change in price
• Shows responsiveness of demand to price
• If :       PE< 1 = inelastic
             PE> 1 = elastic
             PE = 1 = unitary elasticity

• Main determinant = availability of substitutes
         PRICE ELASTICITY
           ILLUSTRATED

     P




po



P1                                 Dpe


                        Dpi


                                   Q
             Qo`   Qi         Qe
               SUPPLY
• Firms produce those commodities
  which, subject to capacity, maximise
  their profit.
• “Supply” = willingness and ability to
                sell a commodity at each
                and every price, over a
                given period of time,
                subject to all else being
                constant (ceterus paribus)
         SUPPLY CURVE
  Price
    $

                   S=MC


 2



1.50



                      No. Mars Bars
     0     2   4
       DETERMINANTS OF
           SUPPLY

•   Price of the commodity
•   Prices of factors of production (cost)
•   State of technology
•   Other “goals” of firm
 INCREASE IN SUPPLY
  Price
              A ® B caused by increase in price
    $         A ® C caused by improved technology

                         S
                              S1
                B
 2


          A
1.50                 C



                             No. Mars Bars
     0    2      4
   ELASTICITY OF SUPPLY
• Supply elasticity = % change in quantity supplied
                         % change in price
• Shows responsiveness of supply to price
• If:       SE < 1 = inelastic
            SE > 1 = elastic
            SE = 1 = unitary elasticity

• Main determinant = flexibility in production
     SUPPLY ELASTICITY
       ILLUSTRATED
                    Si
     P

                                  Se
P1




Po




                              Q
         Qo`   Qi        Qe
MARKET EQUILIBRIUM
  Price
    $

              S=MC




  2



              D=MB
                 No. Mars Bars
      0   2
        EXCESS SUPPLY
Price
  $
                           S
           A       B
3

               E
2




                       D
                               No. Mars Bars
    0     1    2   3
        EXCESS DEMAND

Price
  $



                      S


              E
2

          A       B
1

                          D
                              No. Mars Bars
    0     1   2   3
NECCESSARY CONDITIONS
   FOR COMPETITIVE
       MARKET
1   No barriers to entry or exit (large number
    of independent buyers and sellers)
2   Consumer bears costs and receives
    benefit
3   Consumer has perfect information on cost
    and benefits
WHY HEALTHCARE MARKETS
         “FAIL”

 1. Uncertainty
 2. Imperfect information and
    knowledge imbalance
 3. Monopoly
 4. Externalities
 5. (Equity)
INFORMATION ASYMMETRY
i Lack information on cost, effectiveness,
  benefits etc.

i Not   physically/mentally able to make
  choice.

i Leads   to “agency relationship”.

i Potential   for “supplier-induced demand”.
    IMPLICATION OF SID
P
                    S




               D1       D2
           D
                             Q
            MONOPOLY

MONOPOLY     = one producer who
               determines price and
               quantity

OLIGOPOLY    = few producers who
               collude to set price.
               Engage in non -
               price competition
     EXTERNALITIES


Positive   eg.   Vaccination

Negative e.g. Antibiotic Resistance
POSITIVE EXTERNALITY
  Price
    $

                     S=MC

  4



  2
                          MSB
  1
                  D=MPB
                            Quantity
      0   2   4
                 EQUITY
• The competitive market will yield a
  distribution of commodities which is
  efficient.
• “Inequity” of distribution is NOT a “failure”
  of the market - it is not “designed” to
  achieve this.
• Equity is additional/alternative objective or
  a constraint
      THE “INSURANCE”
          MARKET
Is a means by which a third party will pay for
care out of a central fund that individuals have
paid into; either by premium or taxation.

Is the “market” solution to uncertainty
concerning the timing and magnitude of
expenditure.
DEMAND FOR INSURANCE

Degree of risk aversion
Probability of requiring treatment
Cost of treatment
Premium “loading”
Income
SOCIAL REASONS FOR
   “INSURANCE”

1. Systematic transfer from low to
   high risk, young to old.

2. Systematic transfer of income
   from rich to poor.
      ADVERSE SELECTION

Insurance may cover more high risk than low
risk individuals. If too many high risk cases are
covered, there will be excessive payouts, the
insurance company will lose money, premiums
will have to rise further, and the insurance
company will eventually close.
    IMPORTANCE OF ADVERSE
     SELECTION IN “POOLING”
          HEALTH RISK

1. Variation in individual cost extremely wide.
2. Significant proportion of variance in individual
   cost is predictable.
3. High cost of insurers acquiring knowledge.
“SOLUTION” TO ADVERSE
      SELECTION

h   experience rating
h   exclusions and benefit ceilings
h   subsidisation of those “in need”
h   publicly financed health care systems
        MORAL HAZARD
h   Once insured against “X”, “X” more likely to
    occur.
h   Full insurance means money cost facing
    consumer = zero.
h   Leads to “excess” demand - benefits from
    resources used for providing health care
    less that the benefits foregone from an
    alternative use.
          MORAL HAZARD
$ per unit of HC



          D             Welfare loss




    Po                                         MC




                                        D
                                            Quantity of HC
      0            Qo                  Q1
    “SOLUTION” TO MORAL
          HAZARD
h   use of co-payments or user charges
h   incentives to demand care from selected low-
    cost providers (PPOs)
h   combining insurer with provider (HMOs)
h   use of primary care as “gateway” to services
h   non-price rationing (waiting lists)
              CO- PAYMENTS
$ per unit of HC



          D

                   Welfare loss


    Po                                    MC

    P2

                                   D
                                       Quantity of HC
      0            Qo     Q2      Q1
      PUBLIC INTERVENTION


Subsidisation and/or regulation of private insurers.

Selective subsidies or provision of free services.

Public provision and/or social insurance coverage.

				
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posted:6/12/2013
language:English
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