Question1: Briefly describe opportunity cost citing one example

within the healthcare market

Opportunity cost: The value of the next best choice that one gives
up when making a decision. Also called economic cost
An opportunity cost is the cost of a missed opportunity. It is the opposite of
the benefit that would have been gained had an action, not taken, been
takenthe missed opportunity. This is a concept used in economics. Applied
to a business decision, the opportunity cost might refer to the profit a
company could have earned from its capital, equipment, and real estate if
these assets had been used in a different way. The concept of opportunity
cost may be applied to many different situations. It should be considered
whenever circumstances are such that scarcity necessitates the election of
one option over another. Opportunity cost is usually defined in terms of
money, but it may also be considered in terms of time, person-hours,
mechanical output, or any other finite resource.

Example:
An example of opportunity costs would be if Moi University decided to build
a hospital on vacant land that it owns, the opportunity cost is some other
thing that might have been done with the land e.g farming,renting,
Question2: Describe the term market equilibrium in healthcare and
illustrate the concept by a diagram
Market equilibrium: Market equilibrium is a market state where the supply
in the market is equal to the demand in the market.

Market equilibrium occurs when two economic variables [supply and

demand] are in balance

The market equilibrium comes at that price and quantity where

supply and demand forces are in balance

At such a price the quantity and amount that buyers wish to buy is just
equal to the amount that sellers wish to sell

At the equilibrium, price and quantity tend to stay same as long as

other things remain equal

Equilibrium price and quantity come at that level where the amount
willingly supplied equals the amount willingly demanded.

In a competitive market, this equilibrium is found at the intersection

of supply and demand curves.

No shortages or no surplus are found at equilibrium price.

( e.gPatient
visits)

Question3: In perfect competition a firm is only a price taker and

not a price maker. Briefly Discuss
In perfect market conditions (also called perfect competition) a firm is a price
taker because other firms can enter the market easily and produce a product
that is indistinguishable from every other firms product. This makes it
impossible for any firm to set its own prices.
A price taker is a firm that cannot have any say in setting its own prices. A
price taker simply has to accept the market price. This is in contrast to a
price maker, which can have an influence over the price at which it sells its
goods.
In perfect competition, there are two main reasons why a firm cannot get
away with setting its prices above the market price. First, there is no
difference between its product and that of every other firm in the market. .
Second, if a firm were to succeed in setting a higher price, more firms would

enter the market, attracted by the higher profits that were available. This
would increase supply and drive down the price of the firms product.
In perfect competition, firms sell homogeneous products and it is easy for a
firm to enter the market. These two factors make it impossible for firms to
set their prices above the market price. This makes them into price takers.

Question 4: Distinguish between perfect and imperfect agencies

citing relevant examples
A perfect agent acts in such a way so as to maximize the utility of the
consumer
An imperfect agent fails to maximize the utility of the consumer
Example: Perfect Agency

The agent (health professional) combines their knowledge with the

principals (patients) preferences to determine a choice that the
principal (patient) would have chosen had they been thus informed.

Doctor acts purely in the interest of the principal ie. acts to maximise
the patients utility

Example: Imperfect Agency

In practice, health providers (like other human beings!) are not perfect
at putting the interests of others before their own interests

The agent exploits the relative ignorance of the principal (patient) to

achieve their own objectives

Explain with a suitable example of illustration(s) the concept of

supplier induced demand in an imperfect agency relationship.
In health economics, supplier induced demand (SID) can be defined as the
amount of demand that exists beyond what would have occurred in a market
in which patients are fully informed.In healthcare, a physician acts as an
agent on behalf of the patient (the principal) guiding them to make the best
possible treatment decisions. This agency relationship is influenced by
information asymmetry between a physician and a patient, where it is
assumed that the physician has more knowledge about diagnostic and
treatment options than the patient. Asymmetry of information can also be
influenced by the physician's own clinical experiences, expertise, and
professional judgment as sometimes a patient will request their physician's

personal opinion to aid them in making a healthcare decision. A physician

who is a "perfect agent" is one who would make recommendations for a
patient that the patient would make for themselves if they had the same
information. SID can occur because of a breakdown in this agency
relationship and happens when a physician recommends or encourages a
patient to consume more care than is required for their medical problem, for
example, ordering tests that the physician knows are not needed to make a
diagnosis or ordering treatments that the physician knows will have minimal
benefit.

Based on information from Folland, S., Goodman, A.C., & Strano, M. (2013).
Chapter 15: The Physician's Practice in The Economics of Health and Health

Care.

Boston:

Pearson.