Economics & Efficiency The supply side: resources, production, costs

Transcription

1 Lecture series based on the second edition of Olsen JA: Principles in Health Economics and Policy, Oxford University Press, Oxford, 2017 Lectures were developed for the courses/units Health economics and policy (HEL-3007) Master of Public Health, University of Tromsø, Norway Health economics (ECC 5979) Master of Health Administration, Monash University, Australia Lecture 2a: Economics & Efficiency The supply side: resources, production, costs Jan Abel Olsen University of Tromsø, Norway The subject of Economics How scarce resources are used to produce and distribute goods and services to meet human wants Scarcity Resources have alternative uses opportunity costs Production Technology relationship between input (resources) and output (consumption goods) Consumption Goods yield utility and are demanded based on consumers preferences and abilities to pay 1

2 Production = Input output Labour Capital Raw materials X The typical relationship between one input factor and output 2

3 High vs low marginal productivity Average vs marginal productivity Production function: X = f(l) Average productivity: X/L Total output / Total input Marginal productivity: X/ L Change in output / Change in input Or, what is the change in output following a one unit increased input? 3

4 Average vs marginal costs Total costs = Fixed costs + Variable costs TC = FC + V(X) Average costs AC = TC / X Marginal costs: V(X + 1) V(X) Cost curves 4

5 Productivity and costs The higher the marginal productivity, the lower the marginal costs The lower the marginal productivity, the higher the marginal costs Substitution In most production processes more than more input factor is required and, they are substitutable X = f(l, K) L = Labour K = Capital 5

6 Substitution of input factors If less L, more K is required to maintain a given X 0 Isoquant = equal quantity Cost-effective combination Isoquant Budget line 6

7 Producing more than one good Scarcity Society has a fixed amount of production factors The more production factors used for producing X, the less become available for producing Y The opportunity costs of producing 1 extra X is measured by how many Y the same input factors alternatively could have produced. The production possibility curve: Impossible to increase X without reducing Y Production possibility frontier (PPF) 7

8 Lessons Diminishing marginal productivity Substitution between input factors Input factors have alternative uses in producing other goods We always face opportunity costs 8

9 Lecture series based on the second edition of Olsen JA: Principles in Health Economics and Policy, Oxford University Press, Oxford, 2017 Lectures were developed for the courses/units Health economics and policy (HEL-3007) Master of Public Health, University of Tromsø, Norway Health economics (ECC 5979) Master of Health Administration, Monash University, Australia Lecture 2b: Economics & Efficiency The demand side: preferences and income Jan Abel Olsen University of Tromsø, Norway Consumer behaviour The law of diminishing marginal utility satiation point 9

10 The lower the price, the more we demand Substitution of consumption goods: Many ways to get some satisfaction Utility function: U = u(x, Y) 10

11 The cheapest way to get some satisfaction Indifference curve Budget line Distributing goods across individuals Scarcity Society has a fixed amount of goods The more goods to Ann, the less become available for Betty The utility possibility curve: Impossible to increase Ann s utility without reducing Betty s utility 11

12 Utility possibility frontier (a two-persons economy) Lessons Demand depends on preferences and income Diminishing marginal utility Substitution: Different combinations of goods yield the same utility Scarcity: More goods to Ann means less to Betty 12

13 Lecture series based on the second edition of Olsen JA: Principles in Health Economics and Policy, Oxford University Press, Oxford, 2017 Lectures were developed for the courses/units Health economics and policy (HEL-3007) Master of Public Health, University of Tromsø, Norway Health economics (ECC 5979) Master of Health Administration, Monash University, Australia Lecture 2c: Economics & Efficiency Application to health and healthcare Jan Abel Olsen University of Tromsø, Norway Production of healthcare Doctors, nurses Buildings,machinery Drugs HC 13

14 Production function in healthcare and health Two separate production relationships Input factors HC H HC = f(doctors, nurses, drugs ) H = f(hc) H = f[hc(doctors, nurses, drugs )] The effects of healthcare on health 14

15 The wealth-health space It is certainly better to be rich&healthy than poor&sick!, but is it better to be rich&sick than poor&healthy??? Wealth rich? poor? sick healthy Health Trade-offs in the wealth-health space Wealth rich poor sick healthy Health 15

16 The opportunity costs of healthcare More money for healthcare less for consumption goods More money for the public health sector less for other public sectors More resources for hospitals less for primary care More resources for patient A less for patient B Health possibility frontier H B H A 16

17 Lessons Diminishing marginal productivity of input factors on healthcare of healthcare on health Substitution between input factors types of healthcare for same diagnosis health and wealth Scarcity: Health possibility frontier More healthcare to A means less to B 17

18 Lecture series based on the second edition of Olsen JA: Principles in Health Economics and Policy, Oxford University Press, Oxford, 2017 Lectures were developed for the courses/units Health economics and policy (HEL-3007) Master of Public Health, University of Tromsø, Norway Health economics (ECC 5979) Master of Health Administration, Monash University, Australia Lecture 2d: Economics & Efficiency Supply and demand. Elasticities Jan Abel Olsen University of Tromsø, Norway Supply and demand Supply curve reflects marginal costs Technical reason: Diminishing marginal productivity Input price reason: Increasing unit costs Demand curve reflects marginal benefits The law of diminishing marginal utility Income effect: The more we ve already bought, the less money we have left for buying more 18

19 Market equilibrium: Supply = Demand P* Q* Elasticities of demand: D X = f(p x, p Y, I) The own price elasticity of demand is the relative change in quantity, X, following a relative change in its own price: ε = (ΔX/X) / (Δp X /p X ) The cross price elasticity of demand is the relative change in quantity of good X following a relative change in the price of a related good Y: ε C = (ΔX/X) / (Δp Y /p Y ) The income elasticity is the relative increased demand following a relative income increase: ε I = (ΔX/X) / (ΔI/I) 19

20 Health policy relevance: D X = f(p x ) The own price elasticity of demand is the relative change in quantity, X, following a relative change in its own price: ε = (ΔX/X) / (Δp X /p X ) If we aim to increase the consumption of healthy goods through subsidies, it is important to know how sensitive demand is to lower prices. To which extent will people demand more? If we aim to decrease the consumption of unhealthy goods through indirect taxes, it is important to know how sensitive demand is to higher prices. To which extent will people demand less? Health policy relevance: D X = f(p Y ) The cross price elasticity of demand is the relative change in quantity of good X following a relative change in the price of a related good Y: ε C = (ΔX/X) / (Δp Y /p Y ) If we increase the price of a certain good, Y, that may lead to some indirect effects on the demand for a different good, X. If X is a substitute to Y, people will consume more X when Y gets more expensive. E.g. taxing tobacco may increase the demand for e-cigarettes If X and Y are complementary goods, people will consume less X, when they consume less Y. 20

21 Health policy relevance: D X = f(i) The income elasticity is the relative increased demand following a relative income increase: ε I = (ΔX/X) / (ΔI/I) When income increases, the relative increase in the demand for goods differ Healthcare appears to be income-elastic, i.e. the relative increase in the demand for healthcare is higher than the relative increase in income. The concept of efficiency I Technical efficiency All points on the isoquant, i.e. No waste of input factors Cost efficiency Where the isoquant is tangential to the budget line, i.e. The maximum quantity produced with the given budget, OR The cheapest way of producing a given quantity 21

22 The concept of efficiency II Pareto-efficiency in production all points on the production possibility frontier (PPF), i.e. Impossible to increase the production of X without reducing the production of Y Pareto-efficiency in consumption all points on the utility possibility frontier (UPF), i.e. Impossible to increase Ann s utility without reducing Betty s utility Pareto-efficiency in the production of health all points on the health possibility frontier (HPF), i.e. Impossible to increase Ann s health without reducing Betty s health Lessons The demand for (healthy and unhealthy) goods depend on their prices The success of price interventions to affect demand depends on how sensitive demand is to price changes The concept of efficiency Cost-efficiency optimal combination of different input factors to produce good X Allocative efficiency optimal combination of different goods produced, i.e. X and Y 22