Healthcare Administration in a Perfectly Competitive Market,

Healthcare Administration

In a perfectly competitive market, the following will occur in response to different changes in the market.

A decrease in the wage of clinic-based nurses will cause a reduction in the cost for nurses. This will result in a decline in the price of physician services, because the price decrease is going to be passed onto the consumer. The output of physician services will not change as the cost declines, because the decrease in the cost of the input will be offset with an offset in revenue, essentially leave physician profit -- which should be zero in perfectly competitive market -- unchanged.

Cost-enhancing medical technologies will cause the price of physician services to decline. In a perfectly competitive market buyers have perfect information, so they know that the cost of providing the service has declined. Thus, they will demand that the costs are passed along to them. Again, this should not affect the output of physician services in the sense that the output will not change. The cost per output will change of course, meaning that the physician will be able to perform the services more efficiently.

c. An aging population and more severe patient mix will likely cause the average price of service to increase, since the value of the services provided is likely to increase. In addition, the extra time needed to handle the increased severity of cases is going to reduce the output of physician services since longer time is going to be required of each patient.

d. Declining consumer income is going to result in lower prices for physicians. Under conditions of perfect competition, all firms in the industry are price-takers. Thus, when consumers have less money to spend, the firms in the industry are going to see a reduction in price as the result of that. Some physicians may exit the industry if they cannot subsist on the lower income offered by the consumer. There is free entry and exit in perfect competition so physicians are likely to avail themselves of exit.

e. A lower market price for physician services will result in a lower price of course, and the output of physician services will decline, because some physicians will exit the market in response to the lower market price.

2. There are a number of different factors that have influenced the increase in health care costs in the U.S. from 1960 to today. Inflation is a factor, but real health care costs have also increased. One of the factors is that demand has outstripped supply, especially at the physician level. As medical services become increasingly complex, and consumers demand a greater variety of procedures, including cosmetic, the number of physicians has not grown in proportion to this demand. While the numbers are growing, it is insufficient to meet the increase in demand. Physicians graduating today receive two or three offers, and this drives up the price of physicians (Cauchon, 2005).

3. a. An increase in the incomes of buyers is going to bring more buyers into the market. In the short run this will cause an increase in the price of kidneys. The price increase will bring new suppliers into the market, restoring equilibrium at a higher price.

b. A decrease in the price of dialysis will increase demand for this substitute. A consequence of this is that the demand for kidneys will decrease. The price will therefore drop to entice buyers back into the market, but some suppliers will exit the market, allowing the market to find a new equilibrium at a lower price.

c. This great new drug will reduce transplant risks, bringing new customers into the market. As demand rises, the price of kidneys will also rise until new supply enters the market and a new equilibrium is reached at a higher price.

d. Greater willingness to supply kidneys will increase supply. This will result in a lower price for kidneys. New buyers will then enter the market, and a new equilibrium point will be reached at the lower price.