Hen 368 lecture 8 production and costs
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Transcript of Hen 368 lecture 8 production and costs
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Health Economics
Lecture 8Production and Costs
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Nurses TotalProduct
MarginalProduct∆TP÷∆N
AverageProductTP÷N
TotalCost
MarginalCost
∆TC÷∆N
AverageCost
TC÷N
TotalProfitTP-TC
MarginalProfit
MP-MC
AverageProfit
TPr÷N
1 2 2 2 3 3 1 -1 -1 1
2 6 4 3 5 2 2.5 1 2 0.5
3 12 6 4 8 3 2.67 4 3 1.33
4 15 3 3.75 12 4 3 3 -1 0.75
5 14 -1 2.8 20 8 2.5 -6 -9 0.3
Productivity versus Cost
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Nurses TotalProduct
MarginalProduct∆TP÷∆N
AverageProductTP÷N
TotalCost
MarginalCost
∆TC÷∆N
AverageCost
TC÷N
TotalProfitTP-TC
MarginalProfit
MP-MC
AverageProfit
TPr÷N
1 2 3
2 6 5
3 12 8
4 15 12
5 14 20
Productivity versus Cost
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0
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Total Product Total Cost
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Total Product Total Cost
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-2
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Marginal Product Marginal Cost
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Marginal Product Marginal Cost
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-5
-4
-3
-2
-1
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1 2 3 4 5
Total Profit
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Rule
Maximize Profits
NOT RevenueSell less and make more
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Rule
Watch marginal profit
(marginal revenue - marginal cost)
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Rule
As long as marginal revenue is greater than marginal cost, then keep
going.
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Maximize Profits
As long as marginal revenue is greater than marginal cost, then keep
going.
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Hospital Production
PhysiciansNurses
Other StaffBeds
Other Stuff
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Costs
ExplicitImplicit
Opportunity Costs
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Costs
FixedVariable
BuildingNurses
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Costs
Short RunLong Run
At least one input is fixedAll inputs are variable
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Costs
Sunk CostsCannot recover
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Costs
Transaction Costs
Produce yourself or contract outOutsourcing
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Economies of Scope
When resources can be shared between related
outputs.
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Economies of Scale
Increase output more than increasing cost
Bigger is more profitable
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Remember
It’s not just price or productivity
It’s productivity divided by price
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Ali Fahad
Wage 50 100
Productivity 10 25
Wage ÷Productivity 5 4
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AverageCosts
Quantity
Scale
Economies of Scale
Diseconomies of Scale
The bigger you get, the lower your
costs
The bigger you get, the higher your
costs