DOCSLIB.ORG

The Effects of Hospital Consolidation on Hospital Financial Performance and the Potential Trade-Off of Osph Ital Consolidation for Society" (2014)

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Effects of Hospital Consolidation on Hospital Financial Performance and the Potential Trade-Off of Osph Ital Consolidation for Society The College of Wooster Libraries Open Works Senior Independent Study Theses 2014 The ffecE ts of Hospital Consolidation on Hospital Financial Performance and the Potential Trade-Off of Hospital Consolidation for Society Aaron W. McKee The College of Wooster, [email protected] Follow this and additional works at: https://openworks.wooster.edu/independentstudy Part of the Health Economics Commons Recommended Citation McKee, Aaron W., "The Effects of Hospital Consolidation on Hospital Financial Performance and the Potential Trade-Off of ospH ital Consolidation for Society" (2014). Senior Independent Study Theses. Paper 5895. https://openworks.wooster.edu/independentstudy/5895 This Senior Independent Study Thesis Exemplar is brought to you by Open Works, a service of The oC llege of Wooster Libraries. It has been accepted for inclusion in Senior Independent Study Theses by an authorized administrator of Open Works. For more information, please contact [email protected]. © Copyright 2014 Aaron W. McKee The Effects of Hospital Consolidation on Hospital Financial Performance and the Potential Trade-Off of Hospital Consolidation for Society By: Aaron W. McKee Submitted in Partial Fulfillment of the Requirements of Senior Independent Study for the Department of Business Economics at the College of Wooster Advised By Dr. John Sell Department of Business Economics March 24, 2014 Acknowledgments There are several people I would like to acknowledge for their support and encouragement in the creation of this study. The first is my advisor, Dr. John Sell, who has assisted me in creating this Independent Study for over a year now. Without the guidance and input of Dr. Sell, this process would not have been as fulfilling. I am grateful that I was able to directly work with someone of his caliber and I will certainly miss our weekly discussions when I have graduated from Wooster. Furthermore, I would like to thank Dr. Barb Burnell for bringing the topic of hospital consolidation to my attention and for her patience and support throughout my four years here at the College of Wooster. I appreciate all of her guidance in the process of creating this project and I know that I could fill this page with a list of things that she has done to make my stay at Wooster a truly rewarding experience. I would also like to acknowledge Bill Sheron and Scott Boyes, who are always willing to answer my questions and provide me with input related to the topic of this study. Both Bill and Scott have enhanced this project and I am very thankful for the opportunities they have given me over the past year. Finally, I would like to thank my family and friends for everything they have done to make this project happen. In particular, I would like to thank my mother and father for their encouragement and for allowing me to attend the College of Wooster. In addition, I would like to thank Matt Naticchia, Luke Koniarczyk, Liam Pender, and Christen Kelly for keeping me sane throughout this process. Abstract This study examines the impact of hospital consolidation on the financial performance of consolidating hospitals. In doing so, this study also addresses the potential trade-off of hospital consolidation for society between decreased competition and improved efficiency. Based on economic theory, we hypothesize that hospital consolidation leads to an improvement in hospital financial performance by decreasing competition, which allows consolidating hospitals to charge higher prices, and by increasing efficiency, which lowers the costs of providing a given level of services for consolidating hospitals. Furthermore, we hypothesize that consolidation produces a competition/efficiency trade-off for society, as illustrated by the Williamson Trade-Off Model. We empirically test these hypotheses by running random effects regressions for a financial performance, price, and average cost model. Our results indicate that financial performance does improve for consolidating hospitals following consolidation, but there does not appear to be a trade-off for society. In fact, we find evidence that consolidation increases prices, but leads to an insignificant change in hospital efficiency/costs. Table of Contents I. Introduction..............................................................................................................1 II. Theoretical Analysis.................................................................................................4 2.0 Introduction to the Theoretical Analysis..............................................................4 2.1 Competition..........................................................................................................4 2.2 Efficiency.............................................................................................................8 2.3 The Effect of Hospital Consolidation on Efficiency and Competition..............15 2.4 The Trade-Off of Hospital Consolidation for Society........................................21 2.5 Post-Consolidation Profit Maximization with Two Hospital Facilities.............25 2.6 Summary of the Competition and Efficiency Discussion..................................28 2.7 Control Variables................................................................................................28 2.7.1 The Quality of Hospital Services.........................................................28 2.7.2 Ownership Structure............................................................................31 2.7.3 Population Characteristics and Demographics....................................33 2.8 Conceptual Model and Conclusion to the Theory Section.................................35 III. Review of Empirical Literature............................................................................37 3.0 Introduction to the Literature Section................................................................37 3.1 Heather Radach Sprang, Richard J. Arnould, and Gloria J. Bazzoli (2009)......38 3.2 Robert A. Connor, Roger D. Feldman, and Bryan E. Dowd (1998)..................46 3.3 David Dranove and Richard Lindrooth (2003)..................................................54 3.4 David Dranove (1998)........................................................................................59 3.5 Teresa D. Harrison (2011)..................................................................................67 3.6 Conclusion to the Literature Section..................................................................74 IV. Model Specification................................................................................................75 4.0 Introduction to the Model Specification Section................................................75 4.1 Operationalized Variables and Data Sources.....................................................75 4.1.1 Operationalizing Hospital Financial Performance..............................76 4.1.2 Operationalizing Competition.............................................................77 4.1.3 Operationalizing Efficiency................................................................79 4.1.4 Operationalizing Quality.....................................................................81 4.1.5 Operationalizing Ownership Structure................................................82 4.1.6 Operationalizing Population Characteristics and Demographics........83 4.1.7 Sample of Hospitals............................................................................85 4.1.8 Summary of Operationalized Variables..............................................86 4.2 Operational Models............................................................................................87 4.2.1 The Initial Models...............................................................................87 4.2.2 Panel Data and Panel Regressions.......................................................90 4.2.3 Summary of the Operation Models Section........................................96 V. Empirical Results...................................................................................................97 5.0 Introduction and Summary Statistics.................................................................97 5.1 Results of the Cross-Sectional Regressions.......................................................98 5.2 Potential Econometric Problems in the Cross-Sectional Regressions..............104 5.3 Random Effects Regressions............................................................................107 5.3.1 Results for the Operating Margin Model..........................................108 5.3.2 Results for the Price and Average Cost Models................................111 5.4 Potential Econometric Problems in the Random Effects Regressions.............114 5.5 Adjusted Inpatient Days vs. Adjusted Admissions..........................................118 5.6 Summary of the Empirical Results Section......................................................119 VI. Conclusion.............................................................................................................121 VII. Bibliography.........................................................................................................124 VIII. Appendices............................................................................................................126 Appendix 1: Derivation of Profit Margin and Price Elasticity Relationship.........126 Appendix 2: Price and Average Cost OLS Regressions with Robust SEs............127 Appendix 3: Random Effects Regressions
Load more

Recommended publications
  • Microeconomics Exam Review Chapters 8 Through 12, 16, 17 and 19
    MICROECONOMICS EXAM REVIEW CHAPTERS 8 THROUGH 12, 16, 17 AND 19 Key Terms and Concepts to Know CHAPTER 8 - PERFECT COMPETITION I. An Introduction to Perfect Competition A. Perfectly Competitive Market Structure: • Has many buyers and sellers. • Sells a commodity or standardized product. • Has buyers and sellers who are fully informed. • Has firms and resources that are freely mobile. • Perfectly competitive firm is a price taker; one firm has no control over price. B. Demand Under Perfect Competition: Horizontal line at the market price II. Short-Run Profit Maximization A. Total Revenue Minus Total Cost: The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount. B. Marginal Revenue Equals Marginal Cost in Equilibrium • Marginal Revenue: The change in total revenue from selling another unit of output: • MR = ΔTR/Δq • In perfect competition, marginal revenue equals market price. • Market price = Marginal revenue = Average revenue • The firm increases output as long as marginal revenue exceeds marginal cost. • Golden rule of profit maximization. The firm maximizes profit by producing where marginal cost equals marginal revenue. C. Economic Profit in Short-Run: Because the marginal revenue curve is horizontal at the market price, it is also the firm’s demand curve. The firm can sell any quantity at this price. III. Minimizing Short-Run Losses The short run is defined as a period too short to allow existing firms to leave the industry. The following is a summary of short-run behavior: A. Fixed Costs and Minimizing Losses: If a firm shuts down, it must still pay fixed costs.
    [Show full text]
  • Managerial Economics Unit 6: Oligopoly
    Managerial Economics Unit 6: Oligopoly Rudolf Winter-Ebmer Johannes Kepler University Linz Summer Term 2019 Managerial Economics: Unit 6 - Oligopoly1 / 45 OBJECTIVES Explain how managers of firms that operate in an oligopoly market can use strategic decision-making to maintain relatively high profits Understand how the reactions of market rivals influence the effectiveness of decisions in an oligopoly market Managerial Economics: Unit 6 - Oligopoly2 / 45 Oligopoly A market with a small number of firms (usually big) Oligopolists \know" each other Characterized by interdependence and the need for managers to explicitly consider the reactions of rivals Protected by barriers to entry that result from government, economies of scale, or control of strategically important resources Managerial Economics: Unit 6 - Oligopoly3 / 45 Strategic interaction Actions of one firm will trigger re-actions of others Oligopolist must take these possible re-actions into account before deciding on an action Therefore, no single, unified model of oligopoly exists I Cartel I Price leadership I Bertrand competition I Cournot competition Managerial Economics: Unit 6 - Oligopoly4 / 45 COOPERATIVE BEHAVIOR: Cartel Cartel: A collusive arrangement made openly and formally I Cartels, and collusion in general, are illegal in the US and EU. I Cartels maximize profit by restricting the output of member firms to a level that the marginal cost of production of every firm in the cartel is equal to the market's marginal revenue and then charging the market-clearing price. F Behave like a monopoly I The need to allocate output among member firms results in an incentive for the firms to cheat by overproducing and thereby increase profit.
    [Show full text]
  • A Primer on Profit Maximization
    Central Washington University ScholarWorks@CWU All Faculty Scholarship for the College of Business College of Business Fall 2011 A Primer on Profit aM ximization Robert Carbaugh Central Washington University, [email protected] Tyler Prante Los Angeles Valley College Follow this and additional works at: http://digitalcommons.cwu.edu/cobfac Part of the Economic Theory Commons, and the Higher Education Commons Recommended Citation Carbaugh, Robert and Tyler Prante. (2011). A primer on profit am ximization. Journal for Economic Educators, 11(2), 34-45. This Article is brought to you for free and open access by the College of Business at ScholarWorks@CWU. It has been accepted for inclusion in All Faculty Scholarship for the College of Business by an authorized administrator of ScholarWorks@CWU. 34 JOURNAL FOR ECONOMIC EDUCATORS, 11(2), FALL 2011 A PRIMER ON PROFIT MAXIMIZATION Robert Carbaugh1 and Tyler Prante2 Abstract Although textbooks in intermediate microeconomics and managerial economics discuss the first- order condition for profit maximization (marginal revenue equals marginal cost) for pure competition and monopoly, they tend to ignore the second-order condition (marginal cost cuts marginal revenue from below). Mathematical economics textbooks also tend to provide only tangential treatment of the necessary and sufficient conditions for profit maximization. This paper fills the void in the textbook literature by combining mathematical and graphical analysis to more fully explain the profit maximizing hypothesis under a variety of market structures and cost conditions. It is intended to be a useful primer for all students taking intermediate level courses in microeconomics, managerial economics, and mathematical economics. It also will be helpful for students in Master’s and Ph.D.
    [Show full text]
  • Principles of Microeconomics
    PRINCIPLES OF MICROECONOMICS A. Competition The basic motivation to produce in a market economy is the expectation of income, which will generate profits. • The returns to the efforts of a business - the difference between its total revenues and its total costs - are profits. Thus, questions of revenues and costs are key in an analysis of the profit motive. • Other motivations include nonprofit incentives such as social status, the need to feel important, the desire for recognition, and the retaining of one's job. Economists' calculations of profits are different from those used by businesses in their accounting systems. Economic profit = total revenue - total economic cost • Total economic cost includes the value of all inputs used in production. • Normal profit is an economic cost since it occurs when economic profit is zero. It represents the opportunity cost of labor and capital contributed to the production process by the producer. • Accounting profits are computed only on the basis of explicit costs, including labor and capital. Since they do not take "normal profits" into consideration, they overstate true profits. Economic profits reward entrepreneurship. They are a payment to discovering new and better methods of production, taking above-average risks, and producing something that society desires. The ability of each firm to generate profits is limited by the structure of the industry in which the firm is engaged. The firms in a competitive market are price takers. • None has any market power - the ability to control the market price of the product it sells. • A firm's individual supply curve is a very small - and inconsequential - part of market supply.
    [Show full text]
  • The Revenue Functions of a Monopoly
    SOLUTIONS 3 Microeconomics ACTIVITY 3-10 The Revenue Functions of a Monopoly At the opposite end of the market spectrum from perfect competition is monopoly. A monopoly exists when only one firm sells the good or service. This means the monopolist faces the market demand curve since it has no competition from other firms. If the monopolist wants to sell more of its product, it will have to lower its price. As a result, the price (P) at which an extra unit of output (Q) is sold will be greater than the marginal revenue (MR) from that unit. Student Alert: P is greater than MR for a monopolist. 1. Table 3-10.1 has information about the demand and revenue functions of the Moonglow Monopoly Company. Complete the table. Assume the monopoly charges each buyer the same P (i.e., there is no price discrimination). Enter the MR values at the higher of the two Q levels. For example, since total revenue (TR) increases by $37.50 when the firm increases Q from two to three units, put “+$37.50” in the MR column for Q = 3. Table 3-10.1 The Moonglow Monopoly Company Average revenue Q P TR MR (AR) 0 $100.00 $0.00 – – 1 $87.50 $87.50 +$87.50 $87.50 2 $75.00 $150.00 +$62.50 $75.00 3 $62.50 $187.50 +$37.50 $62.50 4 $50.00 $200.00 +$12.50 $50.00 5 $37.50 $187.50 –$12.50 $37.50 6 $25.00 $150.00 –$37.50 $25.00 7 $12.50 $87.50 –$62.50 $12.50 8 $0.00 $0.00 –$87.50 $0.00 2.
    [Show full text]
  • Monopolies? a Theory of Disequilibrium Competition with Uncertainty
    WORKING PAPER SERIES NO. 19004 ARE “FANGS” MONOPOLIES? A THEORY OF DISEQUILIBRIUM COMPETITION WITH UNCERTAINTY NICOLAS PETIT UNIVERSITY OF LIEGE AND HOOVER INSTITUTION APRIL 16, 2019 Hoover Institution Working Group on Intellectual Property, Innovation, and Prosperity Stanford University www.hooverip2.org Working Paper, April 15, 2019 ARE “FANGs” MONOPOLIES? A THEORY OF DISEQUILIBRIUM COMPETITION WITH UNCERTAINTY Nicolas Petit* Introduction This paper lays down the rudiments of a descriptive theory of competition among the digital tech platforms known as “FANGs” (Facebook, Amazon, Netflix and Google), amidst rising academic and policy polarization over the answer to what seems to be – at least at the formulation level – a simple question: are FANGs monopolies? To date, two streams of thought pervade the competition policy debate. On the one hand, works in favor of the monopoly motion insist on FANG’s control of a large share of output in relevant product(s) or service market(s), high barriers to entry, lateral integration and strong network effects. Some of these works also implicate harder to estimate, and potentially novel, harms like reductions in privacy, labor market monopsony and distortions of the democratic process. On the other hand, a line of argument skeptical of FANG monopolies argues that traditional monopoly harms are not manifest in FANGs. To the contrary, FANGS would outperform textbook monopolies by observable metrics of prices, output, labor or innovation. In addition, the tech industry is rife with examples of once dominant later irrelevant companies like MySpace, AOL or Yahoo!., inviting caution against anticipative monopoly findings. Both perspectives carry weight in competition and regulatory decision-making.
    [Show full text]
  • Price Effects of Horizontal Mergers
    Price Effects of Horizontal Mergers Alan A. Fisher,t Frederick I. Johnson,t and Robert H. Landettt When should the government challenge a merger that might increase market power but also generate efficiency gains? The dominant belief has been that the government and courts should evaluate these mergers solely in terms of economic efficiency. Congress, however, wanted the courts to stop any merger significantly likely to raiseprices. Substantially likely effi- ciency gains should therefore affect the legality of mergers to the extent that they are likely to prevent price increases. This standardis more strict than the economic efficiency criterion, because the latter would permit mergers substantiallylikely to lead to higher prices, if sufficient efficiency gains were substantiallylikely. The authors analyze the competing price effects of market power increases and efficiency gains in the most relevant context: significant mergers in concentratedmarkets-oligopoly. They derivefour general oli- gopoly models and evaluate them over all reasonable ranges for their underlying parameters. This methodology avoids biases due to overly restrictive assumptions. By using the Merger Guideline standardsand data from mergers that the Federal Trade Commission closely examined during 1982-86, the authors analyze empirically relevant tradeoffs between market power increases and efficiency gains. They find that decreases in marginal costs of 0 to 9% could be necessary to prevent price gainsfrom mergers typical t Bureau of Economics, Federal Trade Commission, Washington, D.C. Ph.D. 1973, University of California, Berkeley. ft Senior Economist, General Motors Corporation. Formerly Assistant Director for Antitrust, Bureau of Economics, Federal Trade Commission, Washington, D.C. Ph.D. 1980, University of Minnesota.
    [Show full text]
  • Monopoly Monopoly: Why?
    Monopoly Monopoly: Why? Natural monopoly (increasing returns to scale), e.g . (p arts of) utility companies? Artificial monopoly – a patent; e.g. a new drug – sole ownership of a resource; e.g. a toll bridge – formation of a cartel; e.g. OPEC Monopoly: Assumptions Many buyers Only one seller i.e . not a price-taker (Homogeneous product) Perfect information Restricted entry (and possibly exit) Monopoly: Features The monopolist’s demand curve is the (downward sloping) market demand curve The monopolist can alter the market price by adjusting its output level. Monopo ly: Marke t Be hav iou r p()(y) Higher output y causes a lower market price, p(y). D y = Q Monopoly: Market Behaviour Suppose that the monopolist seeks to maximize economic profit ( y) p( y) y c( y) TR TC What output level y* maximizes profit? Monopoly: Market Behaviour At the profit-maximizing output level, the slopes of the revenue and total cost curves are equal, i.e. MR(y*) = MC(y*) Marginal Revenue: Example p = a – by (inverse demand curve) TR = py (total revenue) TR = ay - by2 Therefore, MR(y) = a - 2by < a - by = p for y > 0 Marginal Revenue: Example MR= a - 2by < a - by = p P for y > 0 P=aP = a - by a a/2b a/b y MR = a - 2by Monopoly: Market Behaviour The aim is to maximise profits MC = MR p MR p y p y < 0 MR lies inside/below the demand curve Note: Contrast with perfect competition (MR = P) Monopo l y: Equ ilib riu m P MR Demand y=Qy = Q Monopo l y: Equ ilib riu m MC P MR Demand y Monopo l y: Equ ilib riu m MC P AC MR Demand y Monopo l y: Equ ilib
    [Show full text]
  • Canada Archives Canada Published Heritage Direction Du Branch Patrimoine De I'edition
    OPTIMIZING EXPANSION OF LOW VARIABLE COST CAPACITY IN COMPETITIVE ELECTRICITY MARKETS: VALUATION OF WIND GENERATION USING STOCHASTIC COMPLEMENTARITY PROGRAMMING By Paul G. Dabrowski A thesis submitted in conformity with the requirements for the degree of Master of Applied Science Graduate Department of Mechanical and Industrial Engineering University of Toronto © Copyright by Paul G. Dabrowski (2008) Library and Bibliotheque et 1*1 Archives Canada Archives Canada Published Heritage Direction du Branch Patrimoine de I'edition 395 Wellington Street 395, rue Wellington Ottawa ON K1A0N4 Ottawa ON K1A0N4 Canada Canada Your file Votre reference ISBN: 978-0-494-45126-7 Our file Notre reference ISBN: 978-0-494-45126-7 NOTICE: AVIS: The author has granted a non­ L'auteur a accorde une licence non exclusive exclusive license allowing Library permettant a la Bibliotheque et Archives and Archives Canada to reproduce, Canada de reproduire, publier, archiver, publish, archive, preserve, conserve, sauvegarder, conserver, transmettre au public communicate to the public by par telecommunication ou par Plntemet, prefer, telecommunication or on the Internet, distribuer et vendre des theses partout dans loan, distribute and sell theses le monde, a des fins commerciales ou autres, worldwide, for commercial or non­ sur support microforme, papier, electronique commercial purposes, in microform, et/ou autres formats. paper, electronic and/or any other formats. The author retains copyright L'auteur conserve la propriete du droit d'auteur ownership and moral rights in et des droits moraux qui protege cette these. this thesis. Neither the thesis Ni la these ni des extraits substantiels de nor substantial extracts from it celle-ci ne doivent etre imprimes ou autrement may be printed or otherwise reproduits sans son autorisation.
    [Show full text]
  • THE MEASUREMENT of MONOPOLY POWER in DYNAMIC MARKETS* by Robert S
    THE MEASUREMENT OF MONOPOLY POWER IN DYNAMIC MARKETS* by Robert S. Pindyck March 1984 Sloan School of Management Working Paper No. 1540-84 Support from the National Science Foundation, under Grant No. SES-8012667 is gratefully acknowledged. ABSTRACT In markets in which price and output are determined intertemporally, the standard Lerner index is a biased and sometimes misleading measure of actual or potential monopoly power. This paper shows how the Lerner index can be modified to provide a meaningful instantaneous measure of monopoly power applicable to dynamic markets, and discusses the aggre- gation of that instantaneous measure across time. The importance of accounting for intertemporal constraints in antitrust and related appli- cations is illustrated by the analysis of four examples: an exhaustible. resource, the "learning curve," costs of adjustment, and dynamic adjust- ment of demand. An analogous index of monopsony power applicable to dynamic markets is also suggested. 1. Introduction The measurement and analysis of monopoly and monopsony power have been a prime concern of industrial organization, and are of obvious importance in the design and application of antitrust policy. Much of the recent literature has focused on the structural and behavioral determinants of monopoly and monopsony power, including the characteristics of costs and demand, and the ways in which firms in the market interact with each other. There has been less concern, however, with the development of a measure of monopoly (or monopsony) power. Instead, the Lerner index, first introduced in 1934, has for years been accepted as the standard measure of monopoly power, and is often used as a summary sta- tistic in antitrust applications.1 The Lerner index is just the margin between price and marginal cost, i.e.
    [Show full text]
  • Mcpeak Lecture 10 PAI 723 the Competitive Model. Marginal Willingness to Pay (WTP). the Maximum Amount a Consumer Will Spend Fo
    McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual’s preferences, we can interpret the demand curve tracing out the consumer’s marginal willingness to pay at different levels of consumption. Consumer surplus (CS) – the monetary difference between what the consumer is willing to pay for a given quantity of good and what the good costs. [show graph] Relies on the fact that the demand curve is downward sloping and that the price for purchasing is the same for all units. The area under the demand curve and above the price line. The area below the price line is expenditure (p times q). If price increases and demand is constant, consumer surplus falls. The decrease in consumer surplus for a given price increase will be larger: • The greater the initial expenditure on the good • The less elastic is the demand curve. Producer surplus. The difference between the minimum amount necessary for the seller to be willing to produce the good and the selling price. [show graph] Producer surplus is revenue minus variable cost. Since profit is revenue minus cost, the difference between profit and producer surplus is fixed cost in the short run, and there is no difference in the long run. The maximum societal welfare comes from maximizing consumer surplus plus producer surplus. Why are there gains to trade? [show graph of when quantity is too low] [ show graph of when quantity is too high] Monopoly.
    [Show full text]
  • AP Microeconomics Vocabulary 2014
    AP Microeconomics Vocabulary 2014 This is a list of every microeconomic term that must be known for the exam. 1. Microeconomics - The branch of economics that studies the economy of consumers or households or individual firms. 2. Macroeconomics - The branch of economics that studies the overall working of a national economy. 3. Scarcity - Scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants, in a world of limited resources. It states that society has insufficient productive resources to fulfil all human wants and needs 4. Economic Efficiency - The use of resources so as to maximize the production of goods and services. 5. Economic Equity - Equity is the concept or idea of fairness. 6. Opportunity Cost - The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity). 7. Productivity - The ratio of the quantity and quality of units produced to the labor per unit of time. 8. Inflation - A general and progressive increase in prices. 9. Philips Curve - A historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation. 10. Market Power - The ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors. 11. Externality - A cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit.
    [Show full text]