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accounting profit: a firm's profit as it
would be measured by the firm's accountants: total revenue minus total
explicit costs (costs for which there is an explicit payment in cash or
kind or debt). See: economic profit, opportunity costs.
allocative efficiency: a state of affairs in which resources are allocated to producing goods and goods are allocated to consumers in such a way that it is impossible to make any consumer better off without making some other consumer worse off. Allocative efficiency in distributing goods in a market economy requires that P = MC. Allocative efficiency in production requires that MPx / Px = MPy / Py for all inputs X and Y.
basic economic questions: a set of questions that that summarize the job of an economic system. The number of questions varies from one economist to another, but the following three are commonly cited:
(1) what to produce and how many of them? (2) how to produce the goods? (3) for whom are the goods produced (who will get the goods)?
capital: in economics, a manufactured durable resource which is used to produce other goods but does not become part of the goods. Physical capital includes tangible machinery, buildings, trucks, computers (if used in business), retail shelves, etc. Homes and inventories are also included as physical capital. Human capital refers to acquired human skills. Like physical capital, resources are required to create human capital through education, and formal or informal training. See: investment.
capitation: a payment system by which an organization (such as a health maintenance organization) receives a fixed payment per member or per patient (i.e., per capita)
corporate hospital: the term usually refers to a for-profit, investor-owned hospital. Since by far, the majority of all hospitals--community, teaching, and for-profit, alike--are incorporated, the term can be misleading.
cross-price elasticity of demand: the elasticity of demand for one good (X) with respect to the price of a different good (Y). Exy = %DQDx / %DPy. The cross-price elasticity of demand for good X shows the responsiveness of the consumers of good X to changes in the price of good Y. If the X and Y are substitutes, then Exy > 0. Example: a brand-name drug and a generic drug. If the X and Y are complements, then Exy < 0. Examples: use of a surgery room and use of a recovery room; ER physicians and X ray technicians. Many goods are neither substitutes nor complements.
diagnostic rate group: (DRG) a category of patients having the same initial diagnosis. The idea was that health care provider's reimbursement would be patient based on the patient's DRG. Any cost savings on the treatment would be profit for the provider, but cost overruns would have to be paid by the provider. See: capitation, PPS.
DRG: see: diagnostic rate group
economic profit: the difference between a firm's total revenue and its total costs--including the opportunity costs of the owners' resources. See: accounting profit.
efficiency: see allocative efficiency, productive efficiency.
elasticity: a way of expressing the effect of a change in one variable on another. The percentage change in the dependent variable divided by the percentage change of the independent variable. E = %DY / %DX. (The character D should be the upper case Greek delta, which stands for "difference" or "change in".) Most often used in connection with demand and supply curves. See: elasticity of demand, own-price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, elasticity of supply.
elasticity of demand: see: own-price elasticity of demand.
elasticity of supply:
health maintenance organization:
HMO: see: health maintenance organization.
incidence: proportion of a population newly diagnosed with a disease or trait during a time period. See: prevalence.
income elasticity of demand: the elasticity of demand for a good (or service) with respect to households' incomes. EM = %DQDx / %DM., where QDx is the quantity demanded of the good X and M is the households' incomes. Goods or services for which EM is positive are called normal goods, while goods for which EM is negative are called inferior goods.
investment: in economics, an increase in capital. Construction of new buildings, machinery, etc. Investment is a flow; it must be measured over a period of time. See: capital.
loading charge: the portion of an insurance
premium that is in excess of the pure premium (q.v.). The loading
charge covers such things as administrative expenses, advertising, and
profits for the insurer.
margin: in general terms, the last additional amount of something; the outer edge
marginal benefit: the additional benefit that results from one additional unit of something. MBx = DTBx/DX where TBx is the total benefit from having X of something.
marginal revenue: the additional sales revenue that results from selling one additional unit of the firm's product. MR = DTR/DQ where TR is the total revenue from selling Q units of the product. TR = P•Q. The marginal revenue will only equal the price of the product when the price of the product is constant. If the firm has to cut the price in order to sell more units, then the marginal revenue will be less than the price.
marginal utility: the additional utility (satisfaction) that a consumer gets from having one additional unit of some good (or service). MUx = DTU/DX where TU is the total utility that the consumer gets while consuming X units of the good, everything else being the same.
normative economics: using value judgements with economics. Saying that something is good, that it should be done, or that X is better than Y are normative statements. See: positive economics.
opportunity cost: the value of the best alternative forgone when a different alternative is chosen. The value may be measured in terms of money, satisfaction, or other goods. See: economic profit, production-possibilities frontier.
own-price elasticity of demand: also called simply the elasticity of demand. The elasticity of the quantity demanded of a good with respect to the price of that good. Ex = %DQDx / %DPx. The elasticity of demand shows consumers' responsiveness to a price change. The more responsive they are to the price change, the larger is (the absolute value of) the elasticity. I.e., an elasticity of demand equal to -3.2 shows more responsiveness than an elasticity of -0.6.
positive economics: using economics is a purely descriptive way. Saying that the unemployment rate is 5.4% or that an increase in nurse's wages would raise the cost of health care are positive economic statements.
PPO: see: preferred provider organization.
PPS: see: prospective payment system.
preferred provider organization:
prevalence: proportion of a population who have a disease or trait. See: incidence.
production-possibilities frontier: also called a production-possibilities curve. A two-dimensional graph which shows the most of one good that can be produced while producing a given quantity of another good. The two axes measure the quantities of the each good being produced. Assumes given availability of resources, given level of technology, and a given time period in which to measure the production of the two goods.
productive efficiency: allocative efficiency applied to production.
profit: a firm's total revenue minus its total cost. Must be measured over a period of time. See: economic profit, accounting profit, normal profit.
prospective payment system: the outpatient equivalent of diagnostic rate groups (DRGs). Medicare will reimburse the eligible clinic a fixed amount based on the patient's initial diagnosis.
pure premium: the portion of an insurance premium that is needed to cover the cost of the expected loss on an actuarial basis.
risk averse: describes a person who prefers to avoid risks. Such a person may take risks but only if the rewards for taking the risks are great enough. Risk averse people invest (cautiously) in the stock market, but they do not gamble. Antonym: risk seeking.
technical efficiency: getting the most output from a given set of inputs. See also productive efficiency.
utility: economists' term for satisfaction. Economists presume that utility can be measured, or at least that consumers act as if their satisfaction could be measured.
last updated February 7, 2002, by Jim Frederick
copyright 2002 Jim Frederick