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9.1: The Production Function

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Defining the Production Function

The production function relates the maximum amount of output that can be obtained from a given number of inputs.

learning objectives

• Define the production function

In economics, a production function relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.

Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor. When firms are deciding how much to produce they typically find that at high levels of production, their marginal costs begin increasing. This is also known as diminishing returns to scale – increasing the quantity of inputs creates a less-than-proportional increase in the quantity of output. If it weren’t for diminishing returns to scale, supply could expand without limits without increasing the price of a good.

Factory Production : Manufacturing companies use their production function to determine the optimal combination of labor and capital to produce a certain amount of output.

Increasing marginal costs can be identified using the production function. If a firm has a production function \(Q=F(K,L)\) (that is, the quantity of output (Q) is some function of capital (K) and labor (L)), then if \(2Q<F(2K,2L)\), the production function has increasing marginal costs and diminishing returns to scale. Similarly, if \(2Q>F(2K,2L)\), there are increasing returns to scale, and if \(2Q=F(2K,2L)\), there are constant returns to scale.

Examples of Common Production Functions

One very simple example of a production function might be \(Q=K+L\), where Q is the quantity of output, K is the amount of capital, and L is the amount of labor used in production. This production function says that a firm can produce one unit of output for every unit of capital or labor it employs. From this production function we can see that this industry has constant returns to scale – that is, the amount of output will increase proportionally to any increase in the amount of inputs.

Another common production function is the Cobb-Douglas production function. One example of this type of function is \(Q=K^{0.5}L^{0.5}\). This describes a firm that requires the least total number of inputs when the combination of inputs is relatively equal. For example, the firm could produce 25 units of output by using 25 units of capital and 25 of labor, or it could produce the same 25 units of output with 125 units of labor and only one unit of capital.

Finally, the Leontief production function applies to situations in which inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. This production function is given by \(Q=Min(K,L)\). For example, a firm with five employees will produce five units of output as long as it has at least five units of capital.

The Law of Diminishing Returns

The law of diminishing returns states that adding more of one factor of production will at some point yield lower per-unit returns.

Learning Objectives

• Explain the Law of Diminishing Returns

In economics, diminishing returns (also called diminishing marginal returns) is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant. The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant (“ceteris paribus”), will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.

Diminishing Returns : As a factor of production (F) increases, the resulting gain in the volume of output (V) gets smaller and smaller.

For example, the use of fertilizer improves crop production on farms and in gardens; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield. A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as workers getting in each other’s way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output will eventually cost increasingly more, due to inputs being used less and less effectively.

This increase in the marginal cost of output as production increases can be graphed as the marginal cost curve, with quantity of output on the x axis and marginal cost on the y axis. For many firms, the marginal cost curve will initially be downward sloping, representing added efficiency as production increases. If the law of diminishing returns holds, however, the marginal cost curve will eventually slope upward and continue to rise, representing the higher and higher marginal costs associated with additional output.

The Law of Diminishing Returns and Average Cost

The average total cost of production is the total cost of producing all output divided by the number of units produced. For example, if the car factory can produce 20 cars at a total cost of $200,000, the average cost of production is $10,000. Average total cost is interpreted as the the cost of a typical unit of production. So in our example each of the 20 cars produced had a typical cost per unit of $10,000. Average total cost can also be graphed with quantity of output on the x axis and average cost on the y-axis.

What will this average total cost curve look like? In the short run, a firm has a set amount of capital and can only increase or decrease production by hiring more or less labor. The fixed costs of capital are high, but the variable costs of labor are low, so costs increase more slowly than output as production increases. As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing. However, as marginal costs increase due to the law of diminishing returns, the marginal cost of production will eventually be higher than the average total cost and the average cost will begin to increase. The short run average total cost curve (SRAC) will therefore be U-shaped for most firms.

Cost Curves in the Short Run : Both marginal cost and average cost are U-shaped due to first increasing, and then diminishing, returns. Average cost begins to increase where it intersects the marginal cost curve.

The long-run average cost curve (LRAC) depicts the cost per unit of output in the long run—that is, when all productive inputs’ usage levels can be varied. The typical LRAC curve is also U-shaped but for different reasons: it reflects increasing returns to scale where negatively-sloped, constant returns to scale where horizontal, and decreasing returns (due to increases in factor prices) where positively sloped.

Inputs and Outputs of the Function

In the basic production function, inputs are typically capital and labor and output is whatever good the firm produces.

• Describe the inputs and outputs in a generalized production function

A production function relates the input of factors of production to the output of goods. In the basic production function inputs are typically capital and labor, though more expansive and complex production functions may include other variables such as land or natural resources. Output may be any consumer good produced by a firm. Cars, clothing, sandwiches, and toys are all examples of output.

Capital refers to the material objects necessary for production. Machinery, factory space, and tools are all types of capital. In the short run, economists assume that the level of capital is fixed – firms can’t sell machinery the moment it’s no longer needed, nor can they build a new factory and start producing goods there immediately. When looking at the production function in the short run, therefore, capital will be a constant rather than a variable. Although in reality a firm may own the capital that it uses, economists typically refer to the ongoing cost of employing capital as the rental rate because the opportunity cost of employing capital is the income that a firm could receive by renting it out. Thus, the price of capital is the rental rate.

Capital Goods : Capital equipment, like these motor graders, can vary in the long run but are fixed in the short run.

Labor refers to the human work that goes into production. Typically economists assume that labor is a variable factor of production; it can be increased or decreased in the short run in order to produce more or less output. The price of labor is the prevailing wage rate, since wages are the cost of hiring an additional unit of capital.

The marginal product of an input is the amount of output that is gained by using one additional unit of that input. It can be found by taking the derivative of the production function in terms of the relevant input. For example, if the production function is Q=3K+2L (where K represents units of capital and L represents units of labor), then the marginal product of capital is simply three; every additional unit of capital will produce an additional three units of output. Inputs are typically subject to the law of diminishing returns: as the amount of one factor of production increases, after a certain point the marginal product of that factor declines.

• The production function describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.
• Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor.
• The production function also gives information about increasing or decreasing returns to scale and the marginal products of labor and capital.
• One consequence of the law of diminishing returns is that producing one more unit of output will eventually cost increasingly more, due to inputs being used less and less effectively.
• The marginal cost curve will initially be downward sloping, representing added efficiency as production increases. If the law of diminishing returns holds, however, the marginal cost curve will eventually slope upward and continue to rise.
• The SRAC is typically U-shaped with its minimum at the point where it intersect the marginal cost curve. This is caused by the first increasing, and then decreasing, marginal returns to labor.
• The typical LRAC curve is also U-shaped, reflecting increasing returns of scale where negatively-sloped, constant returns to scale where horizontal and decreasing returns where positively sloped.
• Capital refers to the material objects necessary for production. In the short run, economists assume that the level of capital is fixed.
• Labor refers to the human work that goes into production. Typically economists assume that labor is a variable factor of production.
• The marginal product of an input is the amount of output that is gained by using one additional unit of that input. It can be found by taking the derivative of the production function in terms of the relevant input.
• Production function : Relates physical output of a production process to physical inputs or factors of production.
• marginal cost : The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output.
• output : Production; quantity produced, created, or completed.
• returns to scale : A term referring to changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).
• rental rate : The price of capital.
• marginal product : The extra output that can be produced by using one more unit of the input.
• capital : Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).

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Principles of microeconomics, lecture 5: production theory, description.

This video introduces the second unit of the course about producer theory. Topics include the production function, short run production, long run production, rates of technical substitution, returns to scale, and productivity. See Handout 5 for relevant graphs for this lecture. 

Instructor: Prof. Jonathan Gruber

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Production and Cost: One Variable Input

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Production Functions - PowerPoint PPT Presentation

Production Functions

Production functions students should be able to use the cobb-douglas production function to calculate: output as a product of inputs marginal and average factor ... – powerpoint ppt presentation.

• Use the Cobb-Douglas production function to calculate
• Output as a product of inputs
• marginal and average factor products as a product of inputs or output and inputs
• Total Factor Productivity Growth
• Construct input demand curve using marginal products.
• In 1998, USAs real GDP per capita was about 1/3 greater than Hong Kong.
• But average US growth rate over the preceding 50 years was about 2 per year. Average HK growth rate was 4.5 per year.
• If these two growth performances continue, in 50 years HK GDP per Capita would be 2.5 times that in the USA.
• Will this occur?
• Because dividends are limited by capital income, dividend growth is determined by GDP growth.
• Nominal GDP growth can be divided into two parts 1) inflation 2) real GDP growth.
• Real GDP growth can be divided into two parts 1) population growth 2) growth in real GDP per capita.
• In Britain in late 1700s a new economic began to take shape
• Key characteristic of this age was use of machinery (or capital) to augment labor.
• Relatively large growth in output
• Population grows more slowly than output
• Large Income Differences Across Countries
• Convergence to World Leaders in Two Areas Europe and East Asia
• Low initial level of Japan and Europe due to destruction of capital stock
• Divergence from World Leaders in Africa and Latin America
• Small Gains in Asia as Whole
• Interesting dynamics amongst East Asian economies.
• An economys value added is produced by its
• Stock of capital equipment denoted Kt
• Labor force denoted Lt
• Technology/Worker Efficiency denoted Zt
• Cobb-Douglas production function
• The parameter, a, is sometimes referred to as capital intensity, i.e., the greater is a, the more important capital is in production.
• Constant Returns to Scale
• If you increase both capital and labor by a factor of N, then you will also increase output by a factor of N
• Implications for Country Size Output per capita depends only on capital per capita and labor per capita, not on population size itself.
• The marginal product of a factor is the extra output that results from the extra use of the factor relative to the size of the increase in factor use.
• Marginal products of very small increases in factor use can be derived with derivatives
• Diminishing returns
• Holding capital technology constant, the marginal product of labor is a decreasing function of labor.
• Holding labor technology constant, the marginal product of capital is a decreasing function of capital.
• We define average productivity of a factor as the ratio of output to the level of factor use
• Under Cobb-Douglas, the marginal product is proportional to average product.
• A firm can raise its profits by increasing labor as long as the cost of the extra labor is less than the extra goods produced. Since the extra goods produced drops as more labor is added, firms will hire more labor until the marginal product flls as low as the real wage.
• Profit maximization suggests that the marginal product of a factor should equal its real cost.
• The real cost of labor is the real wage, the dollar wage rate divided by the price level.
• Under a Cobb-Douglas production function, labor compensation is a constant share of value added.
• Labor compensation is the product of the wage rate and the quantity of labor WtLt.
• Capital income is also a constant share of value added.
• If Xt Yt x Zt then
• When economists study productivity, they often decompose output into two parts
• F output due to the accumulation of the factors of production, capital and labor
• TFP total factor producivity or output due to advances in technology.
• Using Cobb-Douglas, it is easy to do this
• Total factor productivity is implicitly defined as the ratio of output to a combination of the factors of production.
• TFP growth is the difference between output growth and the growth of the combined factor.
• Measuring the growth in F has three parts
• Measuring a. Under Cobb-Douglas, we can measure a, from labors share of income.
• Measuring L. Government statistical bodies periodically measure the stock of labor using surveys of employers or households.
• Measuring K Perpetual Inventory Method. Guess at initial capital stock. Use constant dollar measures of investment and estimates of depreciation to recursively calculate investment.
• The growth rate of factor is
• TFP growth can be calculated as
• Growth accounting attributes those parts of growth that are due to its different elements.

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Production Function: Meaning, Definitions and Features

Production Function: Meaning, Definitions and Features!

Production is the result of co-operation of four factors of production viz., land, labour, capital and organization.

This is evident from the fact that no single commodity can be produced without the help of any one of these four factors of production.

Therefore, the producer combines all the four factors of production in a technical proportion. The aim of the producer is to maximize his profit. For this sake, he decides to maximize the production at minimum cost by means of the best combination of factors of production.

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The producer secures the best combination by applying the principles of equi-marginal returns and substitution. According to the principle of equi-marginal returns, any producer can have maximum production only when the marginal returns of all the factors of production are equal to one another. For instance, when the marginal product of the land is equal to that of labour, capital and organisation, the production becomes maximum.

Meani ng of Production Function:

In simple words, production function refers to the functional relationship between the quantity of a good produced (output) and factors of production (inputs).

“The production function is purely a technical relation which connects factor inputs and output.” Prof. Koutsoyiannis

Defined production function as “the relation between a firm’s physical production (output) and the material factors of production (inputs).” Prof. Watson

In this way, production function reflects how much output we can expect if we have so much of labour and so much of capital as well as of labour etc. In other words, we can say that production function is an indicator of the physical relationship between the inputs and output of a firm.

The reason behind physical relationship is that money prices do not appear in it. However, here one thing that becomes most important to quote is that like demand function a production function is for a definite period.

It shows the flow of inputs resulting into a flow of output during some time. The production function of a firm depends on the state of technology. With every development in technology the production function of the firm undergoes a change.

The new production function brought about by developing technology displays same inputs and more output or the same output with lesser inputs. Sometimes a new production function of the firm may be adverse as it takes more inputs to produce the same output.

Mathematically, such a basic relationship between inputs and outputs may be expressed as:

Q = f( L, C, N )

Where Q = Quantity of output

C = Capital

Hence, the level of output (Q), depends on the quantities of different inputs (L, C, N) available to the firm. In the simplest case, where there are only two inputs, labour (L) and capital (C) and one output (Q), the production function becomes.

Q =f (L, C)

Definitions :

“The production function is a technical or engineering relation between input and output. As long as the natural laws of technology remain unchanged, the production function remains unchanged.” Prof. L.R. Klein

“Production function is the relationship between inputs of productive services per unit of time and outputs of product per unit of time.” Prof. George J. Stigler

“The relationship between inputs and outputs is summarized in what is called the production function. This is a technological relation showing for a given state of technological knowledge how much can be produced with given amounts of inputs.” Prof. Richard J. Lipsey

Thus, from the above definitions, we can conclude that production function shows for a given state of technological knowledge, the relation between physical quantities of inputs and outputs achieved per period of time.

Features of Production Function :

Following are the main features of production function:

1. Substitutability:

The factors of production or inputs are substitutes of one another which make it possible to vary the total output by changing the quantity of one or a few inputs, while the quantities of all other inputs are held constant. It is the substitutability of the factors of production that gives rise to the laws of variable proportions.

2. Complementarity:

The factors of production are also complementary to one another, that is, the two or more inputs are to be used together as nothing will be produced if the quantity of either of the inputs used in the production process is zero.

The principles of returns to scale is another manifestation of complementarity of inputs as it reveals that the quantity of all inputs are to be increased simultaneously in order to attain a higher scale of total output.

3. Specificity:

It reveals that the inputs are specific to the production of a particular product. Machines and equipment’s, specialized workers and raw materials are a few examples of the specificity of factors of production. The specificity may not be complete as factors may be used for production of other commodities too. This reveals that in the production process none of the factors can be ignored and in some cases ignorance to even slightest extent is not possible if the factors are perfectly specific.

Production involves time; hence, the way the inputs are combined is determined to a large extent by the time period under consideration. The greater the time period, the greater the freedom the producer has to vary the quantities of various inputs used in the production process.

In the production function, variation in total output by varying the quantities of all inputs is possible only in the long run whereas the variation in total output by varying the quantity of single input may be possible even in the short run.

Related Articles:

• Meaning, Factors and Nature of Production Function
• Definition of Production Function | Microeconomics
• Production Function in Economics
• Short-Run and Long-Run Production Functions

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Health Production Functions

Jun 15, 2013

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Health Production Functions. Outline. Measures of Health Concepts: Health Production Function Marginal Product of Health Historical Health Production Functions Modern Health Production Functions Contributions of health care Lifestyle &amp; Environment (Pollution) Education.

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Outline • Measures of Health • Concepts: • Health Production Function • Marginal Product of Health • Historical Health Production Functions • Modern Health Production Functions • Contributions of health care • Lifestyle & Environment (Pollution) • Education

Measures of Health Status What do we want: A measure of the population’s health status, that captures those aspects of health that are meaningful, and can be measured with accuracy (i.e., quantifiable). • Two main types mortality and morbidity.

Measures of Health Status:Mortality Measures • Popular measures because is easy to quantify • know when someone dies and is regularly recorded information • Crude death rate • number of deaths per 100,000 population • for some time period—usually a year

Measures of Health Status:Mortality Measures • Infant mortality rate: • Number of death of children < age 1 per 1000 live births • Adjust for age, sex, and race to make more meaningful • Not necessary accurate in low-income and war-torn places • Under-five mortality rate • Mortality rate for elderly

Measures of Health Status:Mortality Measures • Life expectancy at birth (male and female) • Cause of death • In more developed countries, can use the cause of death to make analysis more meaningful • i.e., if studying pollution, may want to look at deaths due to asthma, or respiratory infections for infants (< age 1) or small children (< age 5)

Measures of HealthMortality Measures: Problems Problems with mortality measures • Give information on acute problems that lead to death but don’t provide information on quality of life (do you live in pain and can you perform the tasks you want) • Tend to be used in aggregate data analysis not individual analysis

Measures of HealthMorbidity • Morbidity: A statement about the extent of disability a person suffers as a consequence of a disease over time. • Difficult to quantify because no clear end point and need to asses: duration, severity, and consequences of a disease.

Measures of HealthMorbidity • Need to measure the disability which could be physical, mental, functional, or social. • Some sources of these types of data are: • Hospital inpatient discharge records. • Hospital outpatient discharge records / outpatient records. • Survey data: self health assessments, days lost from work.

Measures of HealthMorbidity • Typical morbidity measures includes: • Restricted-activity days due to illness • e.g. number of working days lost – Table 5.2. • Incidence rate of certain chronic conditions. • Self-assessment of health status. • Measures of mobility or activity (ADLs–activities of daily living). • Biomarkers: a characteristic that is objectively measured and evaluated as an indicator or normal biologic process. For example: blood pressure, cortisol (stress measure).

Measures of HealthMorbidity • Chronic conditions with the highest overall prevalence in US are: • Chronic sinusitis • Arthritis • Asthma • Chronic bronchitis • Diabetes.

Health Production Functions(Determinants of Health: US Pop.) Health Production Function: describes the relationship or flows of inputs and flows of outputs over a specified period. • Where output is usual some measure of health status (HS). • HS=F(inputs to health) • What could the inputs be? • HS=F(health care, environment, education, lifestyle, genetic factors, income)

Health Production Functions Health Status (HS) Does it make sense the curve flattens out, should it bend downwards again? B A A>B : as you increase the number of health care inputs, the effects on total health status decrease. 1 2 3 4 5 6 Health Care Inputs (HI)

Marginal Product of Health Care Marginal Product of Health Care Marginal Product: Is the increment in health status caused by one extra unit of Health Care, holding all other inputs constant? A MP is diminishing in size, demonstrating the law of diminishing marginal returns. B 1 2 3 5 4 Health Care Inputs

Marginal Product of Health Care • Marginal product that is relevant for policy makers: • They want to know if I add one billion dollars to health care, how much will the health status of the population improve. • The marginal product might be different for different types of groups, such as young, elderly, or poor.

Determinants of Health Historical View • To know what factors go into the health production function (inputs) need to understand the determinants of health. • Historical Question: what led to the population explosion and increase in life expectancy?

Why has mortality declined? • Big medicine theory • Antibiotics for infectious diseases • High-tech treatments for cardiovascular disease • Economic growth theory • Nutrition allows one to withstand disease • Public health theory • Better sewers, cleaner water and air • The long reach of early life factors • Maternal nutrition in utero and fetal development • What looks like big medicine now could be long-term effects of better nutrition, public health in the past

Big Medicine • Medicine is often a starting point • Seems logical? • Many studies show effects of medicine for specific conditions • Drug trials • Cardiovascular care • Small pox! • Some better than others • Difficult to assign an overall contribution • Readings question role of Big Medicine

Big Medicine

Big Medicine:Antiobiotics The development of antibiotics helped, but it came very late in the process.

Big Medicine: Cardiovascular Disease Medical advance appears more important for cardiovascular disease.

Economic growth & nutrition • Fogel: Find direct evidence for economic growth hypothesis • Measures of nutrition: • Height (nutrition as a child, esp. up to age 3) • Weight (nutrition as an adult) • Finds • Taller people live longer • People at the appropriate weight live longer • Collected lots of data on weights and heights over time

Economic Growth Explanation • In 1800, people were shorter and below optimal weight given height. • Both heights and weights have increased over time. • Fogel: This explains 50 to 80 percent of mortality decline.

Economic Growth Explanation • This was a time of exploration and many new foods were introduced into people diets. • Agriculture was advancing, new crops, crop rotation, seed production …. • Standards of living were increasing as a result of trade so people had the money to buy more food. • Better nutrition results in stronger immune system

Public Health Explanation • Preston and Deaton response to Fogel: • Fogel presents evidence on nutritional status not availability • Economic growth not only factor in nutrition • Interaction between disease and caloric intake • By 1900, U.S. well-fed  improvement since then? • Relationship between income and health changing • Example: China is about as rich as the US in 1900, but has life expectancy fairly close to US today and far above US in 1900 • Quality of the food matters

The Public Health Revolution • Modern health practices date from the early 20th century (post germ theory) • Macro public health: sanitation; clean water; pasteurized milk • Micro public health: bathing and hand washing • Epidemiological studies: specific public health interventions improve health • Gap in child mortality by class emerges after public health information is available • Upper classes had more information?

The Public Health Revolution First epidemiological study in public health • 1854 and John Snow Cholera outbreak • Sept 1854, 600 people living with a few blocks died of cholera. (thought a low lying cloud caused cholera) • Obtain water by signing up with a water supply company. (there were a couple of companies in area) • One company moved to a less polluted part of Thames–deaths much lower for HH receiving this water. • Matter of public health to make sure water coming from clean areas or to chlorinate the water.

The Long Reach of Early Life • Are recent mortality reductions due to public health or nutrition changes long ago? • Maybe there is much more to play out? • Almond and Mazumder: Effects of in utero exposure to flu • Substantial long-term effects of exposure to flu in utero during 1918 flu pandemic • Do other early life factors matter, but less dramatically?

Effects of in utero flu exposure Peak of flu pandemic 4th quarter of 1918 Spike in poor health: 2nd quarter of 1919

Why has health improved? • Probably all three mattered • Contributions differ by time period • Economic development/nutrition • Most important before c. 1880 • Public health/germ theory • Most important c. 1880-1960 • Improved medical care (Big Medicine) • Most important since 1960

Determinants of HealthModern Day • Contribution of Health Care to Population Health—which part of the health production curve are we on. • Look at elasticity of health status (HS) with respect to health care expenditure (HE).

Determinants of HealthHealth Care – Elasticities in the US Evidence • First three use mortality as HS, last measures activity and morbidity.

Determinants of HealthHealth Care • 1969 and 82 studies how health exp. has little impact. A 10% increase in health care expenditure reduces mortality by at most 1.7%. • Marginal effect of health care on health status is small in US – might be on flat part of health production function. • Need to think about population effects: may be small improvement in health status for one person but summed over the population is a much bigger effect.

Determinants of HealthHealth Care Do you think the elasticities will be the same in other countries developed or developing?

Determinants of HealthHealth Care • Heterogeneity: Medicare lead to greater improvements in the health of black females than white males.

Determinants of HealthHealth Care Young blacks benefit more than whites

Determinants of HealthHealth Care • WIC: government program designed to improve nutrition of women and infant and provide prenatal care. • BCHS: Bureau of Community Health Services Projects: i.e., maternal and infant care and community heath centers • Able to explain 56.5% of black neonate mortality with these health interventions. • But program such as WIC or prenatal care, do more to reduce mortality than expensive neonatal intensive care units (but hospitals make a lot of money from intensive care units).

Determinants of HealthHealth Care Morbidity • Maybe health care is better at reducing morbidity (reduction of pain, mobility, etc.). Evidence: • Newhouse and Friedlander (1980) looked at biomarkers such as blood pressure, cholesterol, abnormal chest Xrays … • Found availability of health care was rarely significantly related to these measures. But better educated individuals had better health. • They did not control for the quality of health care, did these organizations do an adequate job.

Determinants of HealthHealth Care • Rand Health Experiment • Controlled experiment in health insurance • 1974-1982, 7,000 individuals • Randomized into 14 different insurance plans but one health maintenance organization. (different price, same quality) • Co-payments ranged from 0-95% with a maximum outlay of $1000 dollars per participant. • Wanted to test the effects of alternative health insurance policies on the demand for health care and on the health status. • Fully insured purchased roughly 40% more health care.

Rand Health Experiment • Little difference in health status

Determinants of HealthHealth Care Rand Health Experiment (continued) Folland, et al. use this as evidence that health care has little effect on health status. • How would you criticize the study. • Is 40% meaningful (reduce from 2 visits to the doctor to 1 visit?) might not have been going enough to the doctor in the first place.

Determinants of HealthHealth Care • We showed earlier that subgroups mattered. So what is the effect of greater costs on the poor, on newborns, infants or on blacks—other studies show that the poor’s health declined as the amount of insurance they had to pay increased. • Time period of the study, duration of experiment and length of time till poor health are also important factors.

Determinants of HealthHealth Care • Folland summarizes that health care is not a major determinant of health status. • So what else might be?

Determinants of HealthEnvironment and Life Style Factors • Evidence shows that countries whose citizens have better life-styles (lower smoking, more exercise, not excessive drinking…) have better health status. (difference between US and Europe?)

Determinants of HealthEnvironment and Life Style Factors • Fuchs compares average death rates in Nevada and Utah for 1959-1961 and 1966-1988. • Compares these two states because feels they are similar, same level of income and medical care, but Utah has Mormons so smoke and drink less. • To do this better need to control for as many observables as you can (income, pollution levels, % urban population ….)

Determinants of HealthEnvironment and Life Style Factors Concludes the lifestyle is an important part of health.

Determinants of HealthEnvironment and Life Style Factors • What is a major health problem today and what type of life-style factors lead to this? What is being done about it? • There is a lot of work going on studying the effects of air pollution (especially particulate matter) on asthma and other respiratory disease. • If you want to look at recent economic studies look at Chay and Greenstone. • Drug use/smoking/excessive drinking: especially crucial for newborn health.

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