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Health Economics
Lecture 8Production and Costs
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
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
0
5
10
15
20
1 2 3 4 5
Total Product Total Cost
0
5
10
15
20
1 2 3 4 5
Total Product Total Cost
-2
0
2
4
6
8
1 2 3 4 5
Marginal Product Marginal Cost
-2
0
2
4
6
8
1 2 3 4 5
Marginal Product Marginal Cost
-5
-4
-3
-2
-1
0
1
2
3
4
5
1 2 3 4 5
Total Profit
Rule
Maximize Profits
NOT RevenueSell less and make more
Rule
Watch marginal profit
(marginal revenue - marginal cost)
Rule
As long as marginal revenue is greater than marginal cost, then keep
going.
Maximize Profits
As long as marginal revenue is greater than marginal cost, then keep
going.
Hospital Production
PhysiciansNurses
Other StaffBeds
Other Stuff
Costs
ExplicitImplicit
Opportunity Costs
Costs
FixedVariable
BuildingNurses
Costs
Short RunLong Run
At least one input is fixedAll inputs are variable
Costs
Sunk CostsCannot recover
Costs
Transaction Costs
Produce yourself or contract outOutsourcing
Economies of Scope
When resources can be shared between related
outputs.
Economies of Scale
Increase output more than increasing cost
Bigger is more profitable
Remember
It’s not just price or productivity
It’s productivity divided by price
Ali Fahad
Wage 50 100
Productivity 10 25
Wage ÷Productivity 5 4
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
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