Hen 368 lecture 8 production and costs

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Hen 368 lecture 8 production and costs

  1. 1. Health EconomicsLecture 8Production and Costs
  2. 2. NursesTotalProductMarginalProduct∆TP÷∆NAverageProductTP÷NTotalCostMarginalCost∆TC÷∆NAverageCostTC÷NTotalProfitTP-TCMarginalProfitMP-MCAverageProfitTPr÷N1 2 2 2 3 3 1 -1 -1 12 6 4 3 5 2 2.5 1 2 0.53 12 6 4 8 3 2.67 4 3 1.334 15 3 3.75 12 4 3 3 -1 0.755 14 -1 2.8 20 8 2.5 -6 -9 0.3Productivity versus Cost
  3. 3. NursesTotalProductMarginalProduct∆TP÷∆NAverageProductTP÷NTotalCostMarginalCost∆TC÷∆NAverageCostTC÷NTotalProfitTP-TCMarginalProfitMP-MCAverageProfitTPr÷N1 2 32 6 53 12 84 15 125 14 20Productivity versus Cost
  4. 4. 051015201 2 3 4 5Total Product Total Cost
  5. 5. 051015201 2 3 4 5Total Product Total Cost
  6. 6. -2024681 2 3 4 5Marginal Product Marginal Cost
  7. 7. -2024681 2 3 4 5Marginal Product Marginal Cost
  8. 8. -5-4-3-2-10123451 2 3 4 5Total Profit
  9. 9. RuleMaximize ProfitsNOT RevenueSell less and make more
  10. 10. RuleWatch marginal profit(marginal revenue -marginal cost)
  11. 11. RuleAs long as marginalrevenue is greater thanmarginal cost, then keepgoing.
  12. 12. Maximize ProfitsAs long as marginalrevenue is greater thanmarginal cost, then keepgoing.
  13. 13. Hospital ProductionPhysiciansNursesOther StaffBedsOther Stuff
  14. 14. CostsExplicitImplicitOpportunity Costs
  15. 15. CostsFixedVariableBuildingNurses
  16. 16. CostsShort RunLong RunAt least one input is fixedAll inputs are variable
  17. 17. CostsSunk CostsCannot recover
  18. 18. CostsTransaction CostsProduce yourself orcontract outOutsourcing
  19. 19. Economies of ScopeWhen resources can beshared between relatedoutputs.
  20. 20. Economies of ScaleIncrease output more thanincreasing costBigger is more profitable
  21. 21. RememberIt’s not just price orproductivityIt’s productivity divided byprice
  22. 22. Ali FahadWage 50 100Productivity 10 25Wage ÷Productivity5 4
  23. 23. AverageCostsQuantityScaleEconomiesof ScaleDiseconomiesof ScaleThe biggeryou get, thelower yourcostsThe biggeryou get, thehigher yourcosts

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