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Production and Costs
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Health Economics !
Lecture 8 Production and Costs
Qty
Break Even AnalysisSAR
500
Total Cost = 500 + 100 x Q
Total Revenue = 200 x Q
Total Cost = FC + VC x Qty
Fixed Cost - must pay regardless of quantityVariable Cost - must
pay with each increase in quantity
Total Revenue = Price x Qty
Fixed Cost
Fixed Cost
plus Variable
Cost
Loss
Profit
Qty
Break Even AnalysisSAR
500
Total Cost = 500 + 100 x Q
Total Revenue = 200 x Q
Total Cost = Total Revenue500 + 100 x Q = 200 x Q
500 + 100Q = 200Q500 = 100Q
5 = Q
5
1000
Total Production
Nurses
Production
Qty
SAR
Where to Maximize
Profit?
TC TR
MR = MC
NursesTotal
Product
Marginal Product ∆TP÷∆N
Average Product TP÷N
Total Cost
Marginal Cost
∆TC÷∆N
Average Cost
TC÷N
Total Profit TP-TC
Marginal Profit
MP-MC
Average Profit
TPr÷N
1 2 2 2 3 3 1 -1 -1 1
2 6 4 3 5 2 2.5 1 2 0.5
3 12 6 4 8 3 2.67 4 3 1.33
4 15 3 3.75 12 4 3 3 -1 0.75
5 14 -1 2.8 20 8 2.5 -6 -9 0.3
Productivity versus Cost
NursesTotal
Product
Marginal Product ∆TP÷∆N
Average Product TP÷N
Total Cost
Marginal Cost
∆TC÷∆N
Average Cost
TC÷N
Total Profit TP-TC
Marginal Profit
MP-MC
Average Profit
TPr÷N
1 2 3
2 6 5
3 12 8
4 15 12
5 14 20
Productivity versus Cost
0
5
10
15
20
1 2 3 4 5
Total Product Total Cost
0
5
10
15
20
1 2 3 4 5
Total Product Total Cost
-2
0
2
4
6
8
1 2 3 4 5
Marginal Product Marginal Cost
-2
0
2
4
6
8
1 2 3 4 5
Marginal Product Marginal Cost
-5
-4
-3
-2
-1
0
1
2
3
4
5
1 2 3 4 5
Total Profit
Rule
Maximize Profits !
NOT Revenue Sell less and make more
Rule
Watch marginal profit !
(marginal revenue - marginal cost)
Rule
As long as marginal revenue is greater than marginal cost, then keep
going.
Maximize Profits
As long as marginal revenue is greater than marginal cost, then keep
going.
Hospital Production
Physicians Nurses
Other Staff Beds
Other Stuff
Costs
Explicit Implicit
Opportunity Costs
Costs
Fixed Variable
!
Building Nurses
Costs
Short Run Long Run
!
At least one input is fixed All inputs are variable
Costs
Sunk Costs Cannot recover
Costs
Transaction Costs !
Produce yourself or contract out Outsourcing
Learning by Doing
Every time you double output,
reduce average costs by 20 percent
Economies of Scope
When resources can be shared between related
outputs.
Economies of Scale
Increase output more than increasing cost
!
Bigger is more profitable
Remember
It’s not just price or productivity
!
It’s productivity divided by price
Ali Fahad
Wage 50 100
Productivity 10 25
Wage ÷ Productivity
5 4
Average Costs
Quantity
Scale
Economies of Scale
Diseconomies of Scale
The bigger you get, the lower your
costs
The bigger you get, the higher your
costs
