Chapter 9
The Competitive Market
A perfectly competitive market is a type of
market in which
All available goods and services are identical.
THE There are no restrictions on who can enter the
market.
PERFECTLY
There are a substantial number of buyers and
COMPETITIVE sellers.
MARKET None of them can influence the market price.
When applied to healthcare industries,
many of the assumptions of
microeconomic analysis and
Is a Perfectly characteristics of perfect competition
Competitive often do not fit well.
Market
Relevant in
Health Care?
Several examples highlight this point.
First, the nonprofit status of medical firms means that healthcare
providers may not pursue maximum economic profits.
Second, licensure creates a barrier to entry and decreases
potential competition.
Third, consumers typically lack perfect information about prices
and technical aspects of medical services, which may lead to
EXAMPLES physicians practicing opportunistically.
Uncertainty of health risks
Marginal private cost (MPC):
is the change in the producer's total cost brought
about by the production of an additional unit of a
good or service. It is also known as marginal cost
of production. For example if production costs rise
from$1,000 to $1,050 as one more unit of a good
is produced the marginal private cost is $50.
Supply and Marginal private benefit (MPB):
Demand is the single additional benefit that a consumer
receives from consuming one additional unit of a
good or service. For example, if a consumer
purchases a candy bar, the marginal private benefit
of that candy bar is the pleasure that the consumer
receives from consuming it.
By definition, equilibrium occurs when there is
no tendency to change. At P0, consumers are
willing and able to purchase q0 units of the
drug because that represents the utility-
maximizing amount. In addition, producers of
the drug which provide q0 units on the market
Equilibrium: at this price because that is the profit-
maximizing amount. Therefore, both
consumers and producers are perfectly
satisfied with the exchange because both can
purchase or sell their desired quantities at a
price of P0.
Comparative static analysis examines
how changes in market conditions
influence the positions of the demand
and supply curves and cause the
equilibrium price and quantity to change.
Comparative
Statics
suppose that the number of producers has increased for the
production of generic antidepressants, so that it is cheaper to produce
the product at every price.
This would cause a shift outward of the supply curve for a given
demand curve.
This causes a temporary surplus in the market as price remains
constant.
A surplus develops because at the initial price, the quantity supplied
on the new supply curve, S1, is greater than the quantity demanded at
that price.
Explanation: However, price does not remain constant in a competitive market and
is eventually lowered from P0 to P1.
The lower price creates an incentive for consumers to purchase more
of the drug in the market, and quantity demanded increases from q0
to q1.
Therefore, under normal conditions, supply and demand models
predict that a lower price and higher quantity of the drug are
associated with improved technology, all else being constant.
As noted above, firms may enter the industry as changes in profits
in various markets occur. For example, because there are no
barriers to entry in a perfectly competitive market, excess profits
create an incentive for new firms to enter an industry as they
strive to make higher-than-normal rates of return.
On the other hand, economic losses create an incentive for firms
to leave an industry to avoid an unusually low rate of return on
Market Entry their investment.
and Exit
When long run normal profits exist in a perfectly competitive
industry, the market is in long run equilibrium, with firms having
no incentive to enter or exit the industry. Normal profits result
when the revenue generated just covers the opportunity costs of
every input, including the normal return to capital.
Normal profit
