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1.  What are the characteristics of a perfectly competitive market?
2. What is the difference between variable and fixed costs, how do they change in short-run vs. long-run? Provide an example in healthcare.
3.  What does increasing returns mean in the short-run? Provide an example of increasing returns?
4.  From an economic perspective, at what point does a firm decide to shut-down? Explain.
5.  When a market is perfectly competitive what does this imply about the supply curve and the price charged for a particular good?
6.  What is the level of profits in the long-run in a perfectly competitive market? Explain why.
7.  What is the difference between an economic and accounting profit?
8.  What is the principle of diminishing marginal return?

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1 Week 4: The Supply Side: Importance of Costs UMUC HMGT 435 Key Learning Objectives Week 4 • Understand difference between accounting vs. economic costs • Understand characteristics of cost in short-run vs. long-run and impact on: • Average vs. marginal • Input specialization • Diminishing returns • Understand what costs matter for a firm’s pricing decision • Breakeven vs. shut-down prices • Understand what factors constitute a “perfectly competitive” market 2 Accounting vs. Economic Costs and Profits • Economic costs include the “opportunity” cost of inputs used in the production process Economic Cost = Explicit cost + Implicit Cost Accounting Cost = Explicit cost • Explicit cost : actual monetary payments for inputs • Implicit cost: opportunity cost of inputs that do not require a monetary payment • Applies to Profit Equation as Well • Economic Profit = Total Revenue minus Costs (Explicit + Implicit) • Accounting Profit = TR minus C (Explicit only) 3 Factors of Production in Healthcare • From Week 1 introduced the concept of factors of production also called input into the production process • Labor- Doctors, nurses, administrative staff, etc. • Physical capital – Hospitals, doctor’s offices, medical technology, etc. • Natural Resources and Raw Materials – land for the capital to be built, energy sources (oil and gas), raw materials for pharmaceuticals • Entrepreneurship – scientists who develop cures for cancer, drug companies who develop new drugs. • Production Function: Relationship between Inputs (e.g. labor, capital) to and Outputs (e.g. patient care) from the production process 4 The Production Function and Time • Production Function and Time • Short-run: period of time in which firms are able to vary one of the inputs to production • Long-run: period of time in which firms can vary all inputs to production • All inputs are variable in long-run, you can hire and fire labor, you can build more physicians offices and hospitals • Thus, the production function is largely a short-run decision • Within the Short-Run timeframe, firms do face different stages of production based on how much output (and marginal product) they can get from a given input (e.g. labor). 5 The Stages of Production • Increasing returns (Marginal Product (MP) > Average Product (AP) • Each additional worker contributes more to their output. • Example: New physician office with a number of exam rooms and one physician and one admin staff. Adding another physician and admin staff can allow the office to see more patients in a day. • Diminishing returns (MP = AP) • As firm increases workers, output increases but at a diminishing rate. • Example: Too many physicians for same amount of office space means that they will start bumping into each other and rate of growth in patient care will decline • Negative (or decreasing) returns (MP AVC the firm can still operate • A firms would shutdown if P

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