SAM404: Unit 5: Learn More

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SAM303Unit 5

Perfectly Competitive Market

Normal Competitive Market

Price Elasticity of Demand

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In sum, "normal" markets provide a variety of quality levels. There is nothing in quality variation per se that necessarily impedes the workings of a competitive market. We observe differences in quality of hotels, restaurants, clothing, toys, and many other goods and services.

• In some settings, physicians are price takers, but this occurs when health insurers set prices that physicians who care for patients with the insurers' coverage are often obliged to accept as payment in full. When physicians are price takers, the quantity of service often increases in response to administered price decreases.

• In other settings, patients pay physicians directly on a fee-for-service basis. In such situations, the physician is often a price setter, not a price taker. Especially when physicians set prices for services, there is often substantial price dispersion for the same service in a given geographic area. Prices of physicians' services are often higher in areas in which there are more physicians. Normally, in a competitive market, one would expect that an increase in supply would lead to lower prices.

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Some of these stylized facts that seem to be inconsistent with a competitive market can be easily reconciled with economic theory. Other facts are less easily reconciled. We first see how far we can go in reconciling stylized facts of the physicians' services market with standard economic models when:

1. physicians' fees are set by market forces and
2. physicians' fees are set by a public or private administrative organization.

While individual physicians are price takers if the product market is perfectly competitive, they are also price takers when their fees are set by a government agency.

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Created by the Instructional Design Team. 2022