2. Microeconomic Tools

3. Supply and Demand In microeconomics, we typically have suppliers reacting positively to price, and demanders reacting negatively. The two of them combine to provide an equilibrium, that indicates the market quantity and the market price.

4. 100 200300400500 2.50 5.00 7.50 10.00 Price Apples Demand for Apples

5. What affects demand? Price of the good Prices of other goods Consumer income Tastes

6. 100 200300400500 2.50 5.00 7.50 10.00 Price Apples Demand with higher income Demand for Apples

7. Supply of Apples 100 200300400500 2.50 5.00 7.50 10.00 Apples

8. What affects supply? Technological change Input prices Prices of Production-Related Goods Size of the Industry Weather

9. Supply of Apples 100 200300400500 2.50 5.00 7.50 10.00 Apples Improved technology Poor weather

10. Equilibrium of Demand and Supply 100 200300400500 2.50 5.00 7.50 10.00 Apples Supply Demand

11. Equilibrium of Demand and Supply 100 200300400500 2.50 5.00 7.50 10.00 Apples Supply Demand Total Revenue, Total Expenditures

12. Equilibrium of Demand and Supply 100 200300400500 2.50 5.00 7.50 10.00 Apples Supply Demand Shift in Demand

13. Equilibrium of Demand and Supply 100 200300400500 2.50 5.00 7.50 10.00 Apples Supply Demand Shift in Supply

14. Equilibrium of Demand and Supply 100 200300400500 2.50 5.00 7.50 10.00 Apples Supply Demand Shift in Supply Shift in Demand

15. Utility Analysis? In principles courses we often measure utility -- sometimes use “utils”... which is dorky (most of the time). For several analyses in health economics, we’ll want to use more modern analysis …, although for insurance, we’ll go back to “utils” Ordinal utility

16. Indifference Curves Pounds of Spam Health Club Visits 20406080100 25 50 75 100

17. Indifference Curves Pounds of Spam 20406080100 Higher level of utility Health Club Visits 25 50 75 100

18. How much is bought? Pounds of Spam 20406080100 In a month Visits = $20/visit Spam = $10/pound Income = $1500 If price of Spam doubles? Health Club Visits 25 50 75 100

19. Putting them together Pounds of Spam 20406080100 In a month Prescriptions = $20/visit Spam = $10/pound Income = $1500 Health Club Visits 25 50 75 100

20. Putting them together Pounds of Spam 20406080100 In a month Visits = $20/visit Spam = $10/pound Income = $1500 U1U1 U2U2 Health Club Visits 25 50 75 100

21. Putting them together Pounds of Spam 20406080100 In a month Visits = $15/visit Spam = $10/pound Income = $1500 U increases More visits More Spam Why? Health Club Visits 25 50 75 100

22. A close look at the tangency Pounds of Spam 20406080100 In a month Visits = $20/visit Spam = $10/pound Income = $1500 U2U2 -  U/  v = - Mgl. utility of visits  U/  s = Mgl. utility of Spam -p h  v +p s  s Health Club Visits 25 50 75 100

23. A close look at the tangency Pounds of Spam 20406080100 U2U2 -  U/  v = - Mgl. utility of visits  U/  s = Mgl. utility of Spam -p h  v +p s  s -p v  v + p s  s = 0  v/  s = p s /p v Now, for utility MU v /Mu s = (  U/  v)/(  U/  s) =  s/  v p s /p v =  v/  s = MU s /Mu v or Mu v /p v = MU s / p s In a month Visits = $20/visit Spam = $10/pound Income = $1500 Health Club Visits 25 50 75 100