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

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Presentation on theme: "HEA PTP: M207 Health Economics 1 Key Economic Concepts Opportunity cost Efficiency Marginal analysis."— Presentation transcript:

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

2 HEA PTP: M207 Health Economics 2 Opportunity Cost The value of forgone benefit which could be obtained from a resource in its next-best alternative use.

3 HEA PTP: M207 Health Economics 3 An Illustration of Opportunity Cost Possibilities for Health Department Expenditure in a Year

4 HEA PTP: M207 Health Economics 4 Implications of Opportunity Cost 1Deciding to do A implies deciding not to do B, ie value of benefits from A>B. 2Cost can be incurred without £ expenditure. 3Value not necessarily determined by the market.

5 HEA PTP: M207 Health Economics 5 Efficiency Efficiency=maximising benefit for resources used Technical=meeting a given objective at Efficiencyleast cost Allocative=producing the pattern of Efficiencyoutput that best satisfies the pattern of consumer wants

6 HEA PTP: M207 Health Economics 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 HEA PTP: M207 Health Economics 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 MB A = MB B. As cost is opportunity cost this implies MC A = MB A

8 HEA PTP: M207 Health Economics 8 The Margin and the Consumer - Diminishing Marginal Utility Utility/Benefit No Mars Bars MB

9 HEA PTP: M207 Health Economics 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 HEA PTP: M207 Health Economics 10 The Margin and the Producer - Average vs Marginal Cost No of Mars Bars Cost Qm0 MC AC

11 HEA PTP: M207 Health Economics 11 Importance of Marginal Cost - Case of Detecting Colon Cancer

12 HEA PTP: M207 Health Economics 12 MC = MB: An Example Costs and Benefits of Lung Transplantation

13 HEA PTP: M207 Health Economics 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


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