Transcript 5550_l3_2014-Micro 2

Economics 5550/6550
Lecture 3
Finishing Micro Tools
Production and Supply
• Let’s look a little at supply.
• Consider the function for output Q:
• Q = f (X1, X2, X3, ..., Xn),
where we have numerous "factors of production.“
We’re going to discover that this is like utility, but
it is easier, because we CAN measure quantity.
Production and Supply
• What would we like to know?
• What happens to Q if we increase X1? We
call this an output elasticity.
Do we expect
• What is an elasticity?
it to be
Elas. = %Δ Q/ %Δ X1
positive or
Elas = (Δ Q/Q)/(Δ X1/X1)
negative???
• This is an output elasticity
Production and Supply
• If we decrease
X1, how much
must we
increase X2 to
keep Q
constant? This
gives us a
substitution
elasticity.
Isoquant
Expenditures
X2
Q1
Qo
X1
Production and Supply
• Use a hospital as
an example. We
have:
– numerous types X2
of labor, like …
– numerous types
of equipment,
like …
• How do they
substitute?
Does this isoquant
have a large or small
substitution elasticity?
What about this one?
X1
Competitors and Monopolists
• A competitor
faces a
horizontal
demand curve.
• Why?
• Here are the
costs. What is the
firm’s optimum?
MC
AC
Profit
MR
Quantity
q*
Competitors and Monopolists
• With
competition,
what do we see
• Entry!
MC
Profit
• Price falls until
profits equal 0.
Quantity
q** q*
AC
Monopolist
MC
• Faces
downward
sloping demand
curve.
• Faces
downward
sloping marginal
revenue (MR)
curve.
AC
D
MR
Quantity
Monopolist
• Maximizes profit
where marginal
revenue =
marginal cost
MC
AC
Profit
D
MR
Quantity
Only theory? See this!
• September 3, 2014
• A merger of three area health systems will capture
about a third of Metro Detroit’s hospital revenue,
without layoffs or closures.
they say …
• Beaumont Health System, Botsford Health Care
and Oakwood Healthcare said Monday they’re
joining to become one of the region’s largest
health care systems.
• The $3.8 billion, not-for-profit company, which will
be called Beaumont Health, is expected to garner
about 30 percent of hospital revenues in the
region, according to the Michigan Health Market
Review, making it the area’s top health institution
http://www.freep.com/article/20140903/BUSINESS06/309030132/new-beaumont-health-merger
in terms
of revenue.
Only theory? See this!
Ya think?
• When the merger was announced about 18
months ago, one independent health market
analyst said there are good and bad aspects of
mergers such as the one announced Monday.
• “You have opportunities for ... achieving
efficiencies and economies of scale,” said Allan
Baumgarten, publisher of Michigan Health Market
Review. “It also enables them to
make investments in information technology and
improving systems for care management.”
• However, he added, there’s potential consumers
who may have to shell out more to see a doctor.
http://www.detroitnews.com/article/20140623/BIZ/306230072/Metro-Detroit-hospitals-merging-form-Beaumont-Health
Price = Marginal Cost
• Economists like to use, what to us is, a
fairly intuitive definition of economic
efficiency, although it may not be such
to noneconomists.
• In a broad sense we like to define
efficiency in a manner such that
resources are allocated in such a way
that they could not be reallocated so as
to make everyone better off.
Price = Marginal Cost
• Price is the amount that someone, in
particular, the last person, would be willing
to pay (presumably because it brought
him/her well-being).
• Marginal cost is the amount that someone,
in particular, the last producer, must pay in
order to produce the good.
Efficiency is
all about
QUANTITY!
Price = Marginal Cost
• If P = MC, we're in a situation where
essentially if someone was producing
something himself, he/she will have produced
just the right amount.
• If P>MC, then someone is willing to pay more
than it costs to produce the good, and more
should be produced.
• This is the problem that economists have with
situations (often monopolistic) that lead to
equilibria with Price > Marginal Costs.
Fuchs, AER (1996)
• Victor Fuchs is a heavy hitter in health
economics research.
• In 1995-96 he was President of the
American Economic Association.
• Gave an address at the 1996 American
Economic Association Meetings
• Talked about the 1993-94 Clinton Health
Plan Debate
Fuchs, AER (1996)
• Characterized the health policy debate
as “shallow” and “inconclusive.” Asked
“What went wrong?”
– Was the research inconclusive?
– Did we not disseminate it appropriately?
– Do we, as economists, differ in what we
think is important?
• Reported a survey:
Fuchs, AER (1996)
Question
3. U.S. should now
enact some plan
that covers the
entire
population.
7. U.S. should seek
universal
coverage.
19. In the long run,
employers bear
the primary
burden of health
insurance.
Health Economists Theorists
Physicians
62% agree
65%
68%
54%
56%
46%
13%
8%
43%
Fuchs, AER (1996)
• Why didn’t we convince others?
1. Health economists agree on “positive”
questions, but have major disagreements
about policy values.
2. We didn’t do very well in communicating
our results to the public, or even to other
economists.
3. With items like universal coverage,
questions of “values” intrude on traditional
economic analysis.
Next Time
• Chapter 3 -- How we use statistics in
health economics.