HEA PTP: M207 Health Economics 1 Key Economic Concepts Opportunity cost Efficiency Marginal...

HEA PTP: M207 Health Economics

1

Key Economic Concepts

Opportunity cost

Efficiency

Marginal analysis


2

Opportunity Cost

“The value of forgone benefit which could be obtained from a resource in its next-best alternative use.”


3

An Illustration of Opportunity Cost

Possibilities for Health Department Expenditure in a Year

Paediatric Care(No Children

Treated in ‘000’s)

Care of Elderly(No of Elderly

Treated in ‘000’s)

Opportunity Costof Treating

Children in Termsof Elderly Patients

Forgone012345

30282418100

026

122030


4

Implications of Opportunity Cost

1 Deciding to do A implies deciding not to do B, ie value of benefits from A>B.

2 Cost can be incurred without £ expenditure.

3 Value not necessarily determined by “the market”.


5

Efficiency

Efficiency = maximising benefit forresources used

Technical = meeting a given objective at Efficiency least cost

Allocative = producing the pattern of Efficiency output that best satisfies the

pattern of “consumer wants”


6

‘Marginal’ Analysis

Efficiency is achieved only by producing/ consuming something to the point where the (opportunity) cost of the last unit is no greater than the benefit derived from that unit.

Requires assessment of relative costs and benefits of each marginal addition or reduction in production/consumption


7

Example of Marginal Analysis

Two interventions we can allocate our budget to - A and B

How do we allocate this budget to maximise benefits?

Allocate until MBA = MBB. As cost is ‘opportunity cost’ this implies MCA = MBA


8

The Margin and the Consumer - Diminishing Marginal Utility

Utility/Benefit

No Mars Bars

MB

13.2131210

0 1 2 3 4


9

The Margin and the Producer - Cost Functions

Fixed Costs= Do not vary in short term.Cost incurred at zero production

Variable Costs = Vary with output at constant rate

Total Cost = Sum of fixed and variable costs

Average Cost = Total cost no of units of output

Marginal Cost = Additional cost of producing one extra unit of output


10

The Margin and the Producer - Average vs Marginal Cost

No of Mars Bars

Cost

Qm0

MCAC


11

Importance of Marginal Cost - Case of Detecting Colon Cancer

No ofTests

TotalCases

Detected

Additionalcases

Detected

TotalCost

AverageCost per

Case

MarginalCost per

Case1

2

3

4

5

6

65.9469

71.4424

71.9004

71.9385

71.9417

71.9420

65.9469

5.4956

0.4580

0.0382

0.0032

0.0003

77,511

107,690

130,111

148,116

163,141

176,331

1,175

1,507

1,810

2,059

2,268

2,451

1,175

5,492

49,150

469,534

4,724,695

47,107,214


12

MC = MB: An Example

Costs and Benefits of Lung Transplantation

No of Transplants Total Cost Total Benefit Average Cost Average Benefit Marginal Cost Marginal Benefit

1 100 500 100 500 100 500

2 150 900 5 450 50 400

3 180 1200 60 400 30 300

4 230 1400 58 350 50 200

5 330 1500 66 300 100 100

6 530 1550 88 258 200 50

7 1030 1600 147 229 500 50


13

Marginal Analysis as a Concept

Often marginal changes, especially in benefits, difficult to calculate

But, it is thinking behind marginal analysis which is important rather than numbers

HEA PTP: M207 Health Economics 1 Key Economic Concepts Opportunity cost Efficiency Marginal...

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