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Key Economic Concepts Opportunity cost Efficiency Marginal analysis

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

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**An Illustration of Opportunity Cost**

Possibilities for Health Department Expenditure in a Year

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**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”.

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**Efficiency Efficiency = maximising benefit for resources 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”

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‘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

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**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

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**The Margin and the Consumer - Diminishing Marginal Utility**

Utility/Benefit 13.2 13 12 10 MB No Mars Bars

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**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

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**The Margin and the Producer - Average vs Marginal Cost**

MC AC Qm No of Mars Bars

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**Importance of Marginal Cost - Case of Detecting Colon Cancer**

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MC = MB: An Example Costs and Benefits of Lung Transplantation

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**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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