Writing Assignment

Economics Terminology

Review Flashcards

Review the terms below then practice using the flashcards tab.

Adverse Selection

A situation often resulting from asymmetric information

in which individuals are able to purchase insurance at

rates that are below actuarially fair rates plus loading

costs.

Asymmetric Information

Situations in which the parties on the opposite sides of a

transaction have differing amounts of relevant

information.

Average Cost

Total cost represents the sum of all fixed costs and

variable costs in the long run. Average cost equals total

cost divided by the quantity of the output and also equals

the sum of average variable cost (AVC) and average fixed

cost (AFC). In the long run, average total represents the

minimum possible cost per unit of producing any given

level of output when there are no fixed costs.

Capitation

A method of reimbursement in managed care plans in

which a provider is paid a fixed amount per person over a

given period regardless of the amount of services

rendered.

Cardinal Utility

A quantitative measure of the value of a good in terms of

metrically measurable utility. It is used in the study of risk

and insurance.

Case Mix Index

A numerical measure of the assortment of patient cases

treated by a given hospital so that a higher value

indicates a greater average degree of complexity of the

cases.

Ceteris Paribus

Other things being held constant.

Coefficient of Variation

A measure of dispersion equal to the standard deviation

divided by the mean (and sometimes multiplied by 100).

Concentration Ratio

The share of the market sales or production accounted

for by a certain number of the largest firms. Often the

four firm ratio is used.

Consumer Driven Health Plan (CDHP)

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A high deductible health plan coupled with a tax-

advantaged health spending account (HSA or HRA).

Consumers are provided with information and tools to

help with health care service and financing decisions.

Cost Benefit Analysis (CBA)

A method of comparing the monetary value of all benefits

of a social project with all costs of that project.

Demand Function

The relationship between quantity demanded and price

(and other independent variables such as income and

tastes). One could study individual demand as well as

market demand.

Depreciation

The change in the value of a good over time due to

deteriorating physical characteristics or technical

obsolescence.

Discount Rate

The interest rate used when converting sums to be

received at a future date due to a present value.

Economies of Scale

Situations in which the long run average costs of a firm

decline as output increases.

Economies of Scope

Situations in which a firm can jointly produce two or more

goods more cheaply than under separate production of

goods.

Efficiency

Technical efficiency occurs when the firm produces the

maximum possible output from a given set of inputs. This

is distinguished from allocative efficiency-situations in

which either inputs or output are put to their best

possible uses in the economy so that no further gains in

output or welfare are possible.

Elasticity

The percentage change in some dependent variable (e.g.

quantity demanded) resulting from a 1 percent change in

some independent variable (e.g. price). Elasticities that

exceed 1 in absolute value are considered elastic; less

than 1 are inelastic.

Equilibrium Price (quantity)

The price (quantity) at which the quantity demanded and

the quantity supplied are equal.

Expected Value

A measure used with a probability distribution of returns.

This is the sum of each probability multiplied by its

corresponding return.

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Externality

A case in which a consumer (producer) affects the utility

(costs) of another consumer through actions that lie

outside the price system.

Gross Domestic Product (GDP)

The market value of final goods and services produced

within the borders of a country over a period of one year.

Human Capital

A form of intangible capital that includes the skills and

other knowledge that workers have or acquire through

education, training and health care that yields valuable

productive services over time.

Internal Rate of Return

The discount rate that will equate the time streams of

costs and returns of an investment. It is a measure of the

profitability of an investment.

Law of Demand

There is an inverse relationship between price and

quantity demanded, ceteris paribus.

Luxury Good

A good that richer people tend to buy in greater

proportions so that its income elasticity is greater than 1.

Marginal Cost

The increase in total cost resulting from a one unit

increase in output.

Marginal Product

The addition to total output resulting from an additional

unit of the variable input.

Marginal Revenue

The addition to total revenue associated with a one unit

increase in output.

Marginal Utility

The extra utility gained from consuming one more unit of

a good holding others constant. This is a measure of

satisfaction from consuming goods.

Market Demand

The total demand for a good by all consumers in the

market.

Monopoly

Situations in which a firm faces a negatively sloped

demand curve. In a pure sense, there is no other firm

that produces a close substitute for the firm's product.

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Monopsony

Situations in which a firm faces a positively sloped supply

cure in the product or factor market because it is the only

buyer.

Necessity

A good whose consumption does not vary greatly with

changes in people's incomes. More generally, a good with

income elasticity less than 1.

Opportunity Cost

The value of the best alternative that is forgone in order

to get or produce more of the commodity under

consideration.

Ordinal Utility

Utility as evaluated through relative levels of satisfaction

when the particular unit of utility is not essential.

Examples of these numbers are first, second and third.

Perfect Competition

A market structure in which there are (1) numerous buyer

and sellers, (2) perfect information, (3) free entry and exit,

and (4) a homogeneous product.

Prevalence

In epidemiology, the fraction of the population that is

currently infected. Incidence adds new cases to the total

pool of the present cases.

Production Function

The relationship between the maximum output that can

be produced corresponding to any combination of factor

inputs.

Public Good

A good (e.g. national defense) that no one can be

prevented from consuming (i.e. nonexcludable), and that

can be consumed by one person without depleting it for

another (i.e. nonrival). The marginal cost of providing the

good to another consumer is zero.

Quality Adjusted Life Year (QALY)

A measure of health outcomes that incorporates quantity

and quality of life. It uses a weighting system that assigns

a value ranging from 1 (perfect health) to 0 (health state

equivalent to death).

Regression Analysis

Statistical analysis that posits a linear relationship

between a variable to be explained and one or more

explanatory variables.

Risk Aversion

The degree to which a certain income is preferred to a

risky alternative with the same expected income.

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Risk Selection

The enrollment choices made by health plans or

enrollees on the basis of perceived risk relative to the

premium to be paid.

Substitution Effect

The change in quantity demanded resulting from a

relative change in commodity prices, holding real income

constant.

Supplier Induced Demand (SID)

The change in demand associated with the discretionary

influence of providers, especially physicians over their

patients. Demand that is provided for the self-interests of

providers rather than solely for the patients.

Time Costs

The money value of the time lost through travel or

waiting when consuming a product or service.

Yardstick Competition

A regulatory pricing policy in which an average of the

marginal costs of all competing firms is used as a

standard of payment to induce the firm to engage in cost

cutting innovation.

L i c e n s e d u n d e r a C r e a t i v e C o m m o n s A t t r i b u t i o n 3 . 0 L i c e n s e .

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