Economics-Resource-Guide.pdf - ECONOMICS AN INTRODUCTION TO ECONOMICS AND HEALTH ECONOMICS 2019\u20132020 IN SICKNESS AND IN HEALTH An Exploration of

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Unformatted text preview: ECONOMICS AN INTRODUCTION TO ECONOMICS AND HEALTH ECONOMICS 2019–2020 IN SICKNESS AND IN HEALTH: An Exploration of Illness and Wellness The vision of the United States Academic Decathlon® is to provide students the opportunity to excel academically through team competition. Toll Free: 866-511-USAD (8723) • Direct: 712-326-9589 • Fax: 651-389-9144 • Email: [email protected] • Website: This material may not be reproduced or transmitted, in whole or in part, by any means, including but not limited to photocopy, print, electronic, or internet display (public or private sites) or downloading, without prior written permission from USAD. Violators may be prosecuted. Copyright ® 2019 by United States Academic Decathlon®. All rights reserved. Clements High School - Sugar Land, TX Resource Guide Table of Contents SECTION I: FUNDAMENTAL ECONOMIC CONCEPTS . . . . . . . . . . . 6 Basic Assumptions of Economics . . . . . . . .6 Scarcity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Trade-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Opportunity Cost . . . . . . . . . . . . . . . . . . . . . . .7 Rationality . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Gains from Trade . . . . . . . . . . . . . . . . . . . . . . .7 Models and Economic Theory . . . . . . . . . . 7 Positive and Normative Economics . . . . . . . 8 Expectations . . . . . . . . . . . . . . . . . . . . . . .15 Number of Sellers . . . . . . . . . . . . . . . . . . .18 Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . 18 The Characteristics of Competitive Market Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Applications of the Competitive Market Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Changes in Market Equilibrium . . . . . . . . . . 25 Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Using Elasticity . . . . . . . . . . . . . . . . . . . . . . .29 Evaluating Government Policy: The Impact of Price Controls and Taxes . . . . . . . . . . . .32 Efficiency as a Goal . . . . . . . . . . . . . . . . . . . 8 Price Controls . . . . . . . . . . . . . . . . . . . . . . . . 32 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Microeconomics and Macroeconomics . . . .9 International Trade . . . . . . . . . . . . . . . . . . 36 Section I Summary . . . . . . . . . . . . . . . . . . . 9 An Isolated Economy . . . . . . . . . . . . . . . . . . .39 Adding the Opportunity to Trade . . . . . . . . . .39 Comparative Advantage and the Gains from Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 The Political Economy of Trade . . . . . . . . . . 41 SECTION II: MICROECONOMICS . . . . . . . . . . . . . 10 Perfectly Competitive Markets . . . . . . . . . 10 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Shifts in the Demand Curve . . . . . . . . . . . . . .13 Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The Prices of Related Goods . . . . . . . . . . 14 Tastes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Expectations . . . . . . . . . . . . . . . . . . . . . . .15 Number of Buyers . . . . . . . . . . . . . . . . . . .15 Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Shifts in the Supply Curve . . . . . . . . . . . . . . .15 Input Prices . . . . . . . . . . . . . . . . . . . . . . . 15 Technology . . . . . . . . . . . . . . . . . . . . . . . . 15 The Profit Motive and the Behavior of Firms . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Economic Profits and Accounting Profits . . . . 43 Finding the Firm’s Supply Curve . . . . . . . . . .43 Entry, Exit, and the Market Supply Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Imperfect Competition . . . . . . . . . . . . . . . 45 Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Monopoly Supply . . . . . . . . . . . . . . . . . . . . . .47 Welfare Consequences of Monopoly . . . . . . . 48 Dealing with Monopolies . . . . . . . . . . . . . . . . 48 2019–2020 Economics Resource Guide 2 Clements High School - Sugar Land, TX INTRODUCTION . . . . . . . . . . . . . . . . . .5 Creative Destruction: The Profit Motive and the Sources of Economic Change . . . .50 Market Failures . . . . . . . . . . . . . . . . . . . . .51 Externalities . . . . . . . . . . . . . . . . . . . . . . . . . .52 The Effect of Externalities on Resource Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Private Responses to Externalities . . . . . . . . 55 Government Regulation of Externalities . . . . 56 Property Rights . . . . . . . . . . . . . . . . . . . . . . . 56 The Effects of Private Ownership . . . . . . . . . 58 Public and Private Goods . . . . . . . . . . . . . . .58 Private Goods . . . . . . . . . . . . . . . . . . . . . .58 Common Resources . . . . . . . . . . . . . . . . . 58 Collective Goods . . . . . . . . . . . . . . . . . . . 59 Public Goods . . . . . . . . . . . . . . . . . . . . . . 59 Within a Country . . . . . . . . . . . . . . . . . . . 74 During a Specified Period . . . . . . . . . . . . 74 Understanding What GDP Measures . . . . . . 75 Other Ways to Measure GDP: Expenditures Equal Production . . . . . . . . . . . . . . . . . . . . . .75 Yet Another Way to Measure GDP: Income Equals Production Equals Expenditures . . . . 76 Real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Measuring Inflation . . . . . . . . . . . . . . . . . . . . 77 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . 80 Frictional Unemployment . . . . . . . . . . . . .82 Structural Unemployment . . . . . . . . . . . . .82 Cyclical Unemployment . . . . . . . . . . . . . . 82 Economic Growth, Productivity, and Living Standards . . . . . . . . . . . . . . . . . . . . . . . . . . 82 The Circular Flow Model of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 What Determines How Much an Economy Produces? . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Institutions, Organizations, and Government . . . . . . . . . . . . . . . . . . . . . . . .60 Savings, Investment, and the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . .86 Pork Barrel Politics . . . . . . . . . . . . . . . . . . . . 61 Rent Seeking . . . . . . . . . . . . . . . . . . . . . . . . . 61 What Is the Proper Role for Government? . . . . . . . . . . . . . . . . . . . . . . . . .61 Financial Markets . . . . . . . . . . . . . . . . . . . . .87 The Bond Market . . . . . . . . . . . . . . . . . . . 87 The Stock Market . . . . . . . . . . . . . . . . . . . 87 Financial Intermediaries . . . . . . . . . . . . . . . . 88 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Mutual Funds . . . . . . . . . . . . . . . . . . . . . .88 Saving and Investment in Aggregate . . . . . . .88 International Capital Flows in an Open Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 How Financial Markets Coordinate Saving and Investment Decisions . . . . . . . . . . . . . . . 90 Section II Summary . . . . . . . . . . . . . . . . . 62 SECTION III: MACROECONOMICS . . . . . . . . . . . . 64 Macroeconomic Issues . . . . . . . . . . . . . . . 64 Economic Growth and Living Standards . . . . 64 Recessions and Expansions . . . . . . . . . . . . . .68 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . 69 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 International Trade . . . . . . . . . . . . . . . . . . . . 73 Macroeconomic Measurement . . . . . . . . . 73 Measuring Total Output: Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Market Value . . . . . . . . . . . . . . . . . . . . . . 73 Final Goods and Services . . . . . . . . . . . . 74 Money and Prices in the Long Run . . . . . . 93 What Is Money? . . . . . . . . . . . . . . . . . . . . . . .93 Measuring Money . . . . . . . . . . . . . . . . . . . . . 94 The Federal Reserve System, Banks, and the Supply of Money . . . . . . . . . . . . . . . . . . . . . . 95 Bank Runs . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Money and Inflation in the Long Run . . . . . . 98 Why Worry about Inflation? . . . . . . . . . . . . 102 Short-Run Economic Fluctuations . . . . . 103 2019–2020 Economics Resource Guide 3 Clements High School - Sugar Land, TX Price Discrimination . . . . . . . . . . . . . . . . . . .49 Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Monopolistic Competition . . . . . . . . . . . . . . .50 Section III Summary . . . . . . . . . . . . . . . . 117 SECTION IV: AN INTRODUCTION TO HEALTH ECONOMICS . . . . . . .119 Introduction . . . . . . . . . . . . . . . . . . . . . . . 119 The Demand for Health—The Grossman Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Downward Sloping Demand for Health Care . . . . . . . . . . . . . . . . . . . . . . .122 The Link Between Socio-Economic Status (SES) and Health . . . . . . . . . . . . . . . . . . .123 Health Insurance Demand . . . . . . . . . . . .125 Information Asymmetry in Health Insurance and Its Consequences . . . . . . . . . . . . . . . 126 Physician Labor Markets . . . . . . . . . . . . . 128 Hospitals and Other Health Care Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 129 Regulation of the Market for Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 The American Health Care System . . . . . 132 Health Care Systems Around the World . 135 Section IV Summary . . . . . . . . . . . . . . . 137 GLOSSARY OF TERMS . . . . . . . . . . 141 NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 147 BIBLIOGRAPHY . . . . . . . . . . . . . . . .150 2019–2020 Economics Resource Guide 4 Clements High School - Sugar Land, TX Characteristics of Short-Run Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . .106 Potential Output, the Output Gap, and the Natural Rate of Unemployment . . . . . . . . . .106 Explaining Short-Run Fluctuations in Output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 The Aggregate Demand Curve . . . . . . . . . . 109 Wealth Effects . . . . . . . . . . . . . . . . . . . . . 110 Interest Rate Effects . . . . . . . . . . . . . . . . 110 Foreign Exchange Effects . . . . . . . . . . . . 110 The Aggregate Supply Curve . . . . . . . . . . . . 112 The Keynesian Model of Short-Run Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . 112 Inflation in the Keynesian Model . . . . . . . . . 113 Using Fiscal and Monetary Policy to Stabilize the Economy . . . . . . . . . . . . . . . . . . . . . . . . 116 For well over two hundred years, the field of economics has studied how human societies organize themselves to transform their available resources into the goods and services that their members wish to consume. The outlines of modern economic analysis were already apparent in Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, but discussion of topics relevant to economics can be found even earlier in the writings of Aristotle. At its core, economics is concerned with how individuals make choices and how these individual decisions and actions interact with one another to determine what happens at the level of the entire economy. Modern economics approaches this problem from several directions. Whereas microeconomics begins with the analysis of individual decisions and then explores how these individual decisions are coordinated through market transactions, macroeconomics begins by considering aspects of the behavior of entire economies and develops models that help make sense of these observed phenomena. Although these two branches of economic analysis start from different points, they are unified by a set of fundamental assumptions about human behavior. This resource guide begins by describing the basic assumptions on which all economic analysis rests. The list of these assumptions is relatively short, and, as you will see, it is not terribly controversial. Yet, these assumptions provide the basis for the development of an extremely rich and flexible set of theories that can account for a wide range of observed phenomena. In the second and third sections of the resource guide, we describe some of the most important themes in economics. The second section provides a description of microeconomics. This section starts with the model of perfectly competitive markets. Although the assumptions of this model apply precisely to only a small subset of economic activity, it is a crucial starting point. In the remainder of the section, we show how relaxing the assumptions of the perfectly competitive model allows us to analyze a much broader range of phenomena, and how this analysis in turn leads to important insights about public policy and individual actions. The third section of the resource guide turns to the subject of macroeconomics. It begins by describing important characteristics of aggregate economic performance and how these characteristics are measured. It then lays out a framework for understanding differences over time and across countries in the quantity of output produced by economies and for understanding short-run fluctuations in economic activity. In the fourth and final section of this resource guide, we employ some of the conceptual tools developed in the first three sections to examine the topic of health economics. NOTE TO STUDENTS: You will notice as you read through the resource guide that some key terms and phrases are boldfaced. While many of these terms are defined and/ or explained in the text of the guide, you can also find explanations of these terms in the Glossary of Terms at the end of the resource guide. 2019–2020 Economics Resource Guide 5 Clements High School - Sugar Land, TX Introduction Section I It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. —Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations Economics is about everyday life, about the choices each of us makes, and how these choices affect our neighbors, our community, our nation, and our world. Looking at these choices from the perspective of economics helps to illuminate hidden wonders in the everyday world around us. For example, the next time you stop at the supermarket to pick up a loaf of bread on your way home, pause for a minute to reflect on your surroundings. If your supermarket is like most, there will be rows of fresh produce, aisles of baked goods, shelves full of laundry detergent, cases of frozen foods and dairy products, and many other items. In fact, the average supermarket carries almost 47,000 different items.1 That each of these items is on the shelf is the result of a complicated chain of decisions by an almost uncountable number of different people. For example, for a loaf of bread to reach the store, a farmer had to decide to grow the wheat, a milling company had to purchase the wheat and grind it into flour, a bakery had to purchase the flour along with other ingredients and then combine them to produce the loaf, and finally this perishable product had to be delivered in a timely fashion to the store. Each product has a similar story. When you go to the store, you expect to be able to find the bread and all the other products your supermarket carries; but what insures that all of them will be there, as they almost always are? No one ordered the farmer to grow wheat, or the baker to bake bread; they didn’t take these actions so that you could stop to pick up a loaf of bread on the way home; they did what they did because it was in their own best interest. Yet somehow, almost magically, all of these individual choices were coordinated so that when you arrive at the store there is an entire aisle of different types of bread available for you to choose from. Now step back and consider the fact that the store you are in is only one of thousands of supermarkets across the country, and that the supermarket is only one of the many millions of businesses that make up our economy. Many people take all of this for granted, but as the example of less developed countries around the world makes clear, there is nothing automatic or inevitable about how well our economy functions. Economics can help us to understand both why our economy functions smoothly most of the time, and why it occasionally breaks down. BASIC ASSUMPTIONS OF ECONOMICS Economics is the study of how individuals make choices about how to allocate scarce resources in order to satisfy virtually unlimited human wants and about how individuals interact with one another. While economists study a vast range of different behaviors, their work is unified by their reliance on a few seemingly simple, yet remarkably powerful assumptions. 2019–2020 Economics Resource Guide 6 Clements High School - Sugar Land, TX Fundamental Economic Concepts Scarcity is an inescapable fact of human existence. There are only twenty-four hours in the day to devote to work, study, play, sleep, and other essential activities. No matter how wealthy a society is, the amount of work, energy, knowledge, and capital available to produce the goods and services people wish to consume is limited. On the other hand, our desires are insatiable. Just as families must choose how much income to spend on food, clothing, vacation travel, and savings for retirement, societies face choices about how much of their resources to devote to healthcare, national defense, and education. Trade-offs Scarcity implies that every choice we make requires us to give up something to get something else. If you decide to spend an hour watching television, then that is one less hour you have available to study. Similarly, if you choose to spend $10 to go to a movie, then you have $10 less to spend on video games or to save for college expenses. Opportunity Cost The cost of what you choose is what you have to give up to get it. Economists call what you give up the “opportunity cost” of your choice. It is important to note that the opportunity cost is not necessarily the same as the monetary price you pay. For example, suppose a friend offers you a free ticket to a baseball game. You may not have to pay for the ticket, but the opportunity cost of attending the game is the value of what you would have been doing during that time if you had not gone to the game. For example, if you had been planning to work mowing lawns, the opportunity cost of this choice is the income from mowing that you would forego by attending the game. Opportunity cost is a seemingly simple concept but applying it can sometimes be rather tricky. Consider the cost of attending college. It might seem obvious that the cost of attending college is the sum of the price of tuition, books, room and board. But this answer excludes an important cost of attending college. For most people, the biggest cost of attending college is the value of their time. By choosing to attend class and do homework, you are giving up time that could otherwise be spent working for pay. At the same time, the explicit monetary costs of attending college may overstate the true expense. Even if you did not attend college, you would still need to eat and have someplace to live. Thus, the costs of room and board are not really part of the cost of college. Rationality Economics assumes that people make choices by comparing the benefits of each action with the opportunity costs of that action and then select the action that produces the greatest benefit. It is important to note that the benefits can be interpreted broadly. Many people care a great deal about social issues—such as reduci...
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