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