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Micro-economic Tools for Health Economics
Abdur Razzaque SarkerMHE (Health Economics), MSS (Economics)
Health Economics and Financing Research, icddrband
PhD Fellow in Strathclyde University, UKEmail: [email protected]
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Outline: • Scarcity and opportunity cost • Efficiency• Demand • Supply• Market Equilibrium • Elasticity• Consumer Theory: Indifference Curve ,Utility and Budget
Constraint• Production Possibility Frontier• Supplier Induced demand
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Scarcity and Opportunity Costs
Scarcity means that there are not, and can never be, enough resources to satisfy all human wants and needs.
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Opportunity Cost: The cost of the foregone opportunity
Real cost of an activity (for example, provision of hospitalservices) as the other outputs that must be given up (for example, other health services such as immunizations, or non-health services or commodities such as defense or vehicles) because productive resources are committed to it.
Scarcity and Opportunity Costs
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Efficiency is an instrumental concept, it is always necessary to specify clearly the outcome being sought or the ‘output’ being produced.
Efficiency
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Efficiency……!!!!!!!!!
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Elements of Efficiency
Do not waste resources
Produce each output at least cost
Produce the types and amounts of output that people
value most
These are the three main elements of efficiency
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Elements of Efficiency
Do not waste resources
Produce each output at least cost
Produce the types and amounts of output that people
value most
Production
Efficient Resource Allocation
Consumption
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Elements of Efficiency
Do not waste resources
Produce each output at least cost
Produce the types and amounts of output that people
value most
Production
Efficient Resource Allocation
Consumption
Supply and Demand
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Elements of Efficiency
Do not waste resources
Produce each output at least cost
Produce the types and amounts of output that people
value most
Technical Efficiency Cost-effective efficiency Allocative Efficiency
Technical efficiency requires that for any given amount of output, the amount of inputs used to produce it is minimized (e.g. hospital…??)
It requires that, in addition to technical efficiency being attained, inputs be combined so as to minimize the cost of any given output
Resources be used to produce the types and amounts of outputs which best satisfy
people
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Allocative Efficiency
Example…!! If mothers of young children want counseling services
for behavioral problems instead of frequent well-child check-ups, then allocative efficiency might be improved by changing the mix of primary care services even if the well child examinations were being provided cost effectively
If producers are supplying too much or too little of any good or service relative to consumers' wishes it leads to allocative inefficieny
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Doing the right things Doing things right
Elements of Efficiency
Do not waste resources
Produce each output at least cost
Produce the types and amounts of output that people
value most
Technical Efficiency Cost-effective efficiency Allocative Efficiency
Efficiency means both 'doing things right' (technical efficiency and cost-effectiveness), and 'doing the right things' (allocative efficiency)
Pareto Efficiency..?????12
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Demand
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Demand :How much of a good a consumer is ready to buy at a certain price, holding other things constant.
Factors affecting demand of a good:
Good’s own price Income of the consumer Price of related goods Tastes/preferences Various sociological factors Factors outside human control, such as the weather
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Law of demand • The law of demand states that; the higher the
price of a good the lower the quantity demanded
• If Price increases then Quantity demanded decrease
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Demand Schedule Price Quantity demanded
30 TK/KG 6 KG40 TK/KG 4 KG50 TK/KG 3 KG60 TK/KG 2 KG
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Deriving a Demand Curve
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Downward sloping demand curve
Price
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50
40
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Quantity demanded
Demand Curve shows the relationship between the price of a good and quantity demanded of the good
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Movement Vs Shift of Demand Curve
• We move along the demand curve only when the price of the good changes
Demand curve shifts because of:• Change in income• Change in price of a substitute • Change in price of a complement • Change in tastes and preference
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Other Economic Factors Affecting Demand
• If income increases, then at any given price, consumer is willing and able to purchase more q
18q0 q1
Price
P0
DO D1
Physician Visits
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Other Economic Factors Affecting Demand
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Substitutes - Goods which satisfy the same needs of the consumer and therefore can
replace each other in use e.g. Coke and Pepsi e.g. Butter and Jam e.g. CNG gas and Petrol
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Other Economic Factors Affecting Demand
• e.g. Coke and Pepsi• If price of Coke increases, D for Pepsi___
20
P
D0D1
Demand for Pepsi
Demand for Pepsi----
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Other Economic Factors Affecting Demand
Complements - • Two goods are complementary if using more
of good A requires use of more good B.• When two goods are consumed together
e.g. left shoe and right shoe e.g. DVD players and DVDs e.g. Tea and Sugar e.g. Car and Petrol
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Other Economic Factors Affecting Demand
• If Price of petrol become cheaper, consumption or demand for car increases___
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2. Complements
P petrol
D0D1
Quantitiy of petrol demanded
Price of car falls (Price of petrol unchanged)
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Supply:
The amount of a good, a producer/seller is ready to sell at a given price, holding other things constant.
Factors affecting supply of a good:
• The price of the good• Technology• Price of input• Gov’t policies and regulations
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Supply
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Law of Supply
• All other factors remaining unchanged; as the price of a good increases, the quantity of the good offered by a supplier increases and vice versa.
• Price increases quantity supplied increases
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Supply Schedule Price Quantity Supplied
30 TK/KG 2 KG
40 TK/ KG 4 KG
50 TK/ KG 6 KG
60 TK/KG 8 KG
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Deriving a Supply Curve
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Supply curve shows the relationship between price and quantity supplied of a good; ceteris paribus
Price
P1
P0
q0 q1
Supply curve is upward sloping
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Other Economic Factors Affecting Supply
• If price of factors of production (land, labor, capital) increases i.e. cost of production increases, then at any given quantity, producer charge more prices.
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1. Cost of production
q0
Price
P0
SOS1
Physician Visits
P1
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Other Economic Factors Affecting Supply
• If technology improves, then at any given price, producer will be willing to sell more
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2. Technological Improvement
q0
Price S0
Physician Visits
P0
q1
S1
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The market
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Quantity per time period
Price
D
S
PE
QE
Equilibrium
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P1> PE [excess supply]
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Quantity per time period
Price
D
S
PE
QE QSQD
P1
If there is Excess Supply in the market then there will be an downward pressure in price and price will decrease until it reaches the equilibrium
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P1< PE [Excess demand]
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Quantity per time period
Price
D
S
PE
QEQS QD
P1
If there is ED in the market then there will be an upward pressure in price and price will increase until it reaches the equilibrium
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Elasticity – the concept If price rises by 10% - what happens to
demand? We know demand will fallHOW MUCH?3 Possibilities-1. By more than 10%?2. By less than 10%3. Not more or not less than 10% That means in the first cases the
responsiveness is more. And........ Elasticity measures the extent to which
demand will change32
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If demand changes a lot when the price changes, wesay that demand is relatively elastic
If demand changes only slightly when price increases, we say it is relatively inelastic.
Elasticity of Demand
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ElasticityPrice (£)
Quantity Demanded
10
D5
5
6
Govt decides to lower price to attract utilization
Not a good move!
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ElasticityPrice (£)
Quantity Demanded
D
10
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Govt. decides to reduce price to increase usages
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Good Move!
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Elasticity When we see an elasticity larger than -1 it is elasticdemand, meaning a change in price has a relatively large impact on demand
If the elasticity is between 0 to -1, it is inelastic demand – the percentage change in demand is smaller than the percentage change in price
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Consumer theory
• The consumer will choose the best bundle he can afford
• The theory has two parts:– What do we mean by best bundle– What a consumer can afford
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Consumer Preference
• Three assumptions: – Completeness: Consumer can clearly describe his
preferences over different bundles . He is able to clearly say whether he is indifferent between two bundles A and B or whether he prefers one over another .
– Transitivity: If A is preferred to B and B is preferred to C, then A must be preferred to C.
– Non-satiation : More is always better.
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Preference Map
• Preference Map: If a consumer’s preferences/ behavior satisfies this three assumptions then we can put his preferences into a graph. Preference map is a graphical representation of a consumer’s preference. It is the collection of all indifference curves.
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Indifference Curve• Indifference curve is the combination of all
consumption bundles among which the consumer is indifferent.
2
1
1 2
IC1
Movie
pizza
A
B
C
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Properties of Indifference Curve
• Consumer always prefers higher indifference curve (further from the origin).
• Indifference curves are downward sloping• Any two indifference curves can not cross
each other.
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Marginal Rate of Substitution
• The MRS measures the amount of one product a consumer must be given to compensate for giving up one unit of the other.
• The slope of the Indifference curve is MRS= - • MRS is not constant, it varies over the indifference
curve
• As we move down along the IC, MRS falls.
2
1
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Budget Constraint• The budget constraint
indicates the set of bundles the consumer can afford with a given income
• Slope of the budget constraint to the right is Pc/Pb, and measures how much beef must be sacrificed to get one more pound of chicken
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Consumer Equilibrium
• To maximize satisfaction given a budget constraint, the consumer will seek the highest attainable indifference curve
• Consumer will choose the point at which indifference curve is tangent to the budget line.
• In the diagram to the right, point A on indifference curve U2 represents the best the consumer can do
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Production Possibility Frontier
• A curve that shows which alternative combinations of commodities can just be attained if all resources are used; it is thus the boundary between attainable and unattainable commodity combinations.
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Production Possibility Frontier
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Externalities
• Externality—Actions of one party make another worse/better off, yet the first party does not bear these costs or receive these benefits
• Negative Externality – Second hand smoking, spread of a contagious disease by a person who rides a public bus, driving while intoxicated and injuring another
• Positive Externality –using a condom, deworming
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The Agency Relationship A doctor-patient relationship is most frequently seen
as one of agency The patients (principals) are less informed than
doctors (agents) about the relationship between healthcare and health.
The perfect agent physician chooses the health services as the patient himself would choose if only the patient possessed the information that the physician does.
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Imperfect Agency and Supplier-Induced Demand (SID)
Supplier-induced demand (SID) refers to the phenomenon of physicians deviating from their agency responsibilities to provide care for their self-interests rather than their patient interests
SID represents one of the major intellectual and policy controversies in health economics.
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Reinhardt Fee Test of Inducement
Q1 Q2 Q3 Q4
P4
P1
P3
P2
Utilization of Healthcare
Price of Healthcare
D1
D2
D3S1
S2
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References:
• Philip Jacobs (1991), The Economics of Health and Medical Care. Third Edition, Aspen Publishers Inc.
• S. Folland, A.C. Goodman and M. Stano (2000), The Economics of health and health Care, Macmillan, 3rd edn.