DIPLOMA OF HEALTHCARE

MANAGEMENT

DHM 2133
HEALTH ECONOMICS

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 DHM 2133
Lecture by: LALITA
ANBARASEN

CHAPTER 6: Healthcare
Production, Costs, and
Supply
Introduction

A production function identifies how various inputs can be combined

and transformed into a final output.

Each combination is assumed to be technically efficient because it

results in the maximum amount of output.
SHORT RUN COSTS FOR A MEDICAL FIRM

Economists and accountants refer to costs differently. Accountants considers

only the explicit costs of doing business when determining the accounting
profits of a medical firm.

Explicit costs are easily identified because a recent market transaction is

available to provide an accurate measure of costs.

Wage payments to staff, utility bills, and medical supply expenses are all
examples of explicit costs of healthcare firms.

Economists consider both the explicit and implicit costs of production. Implicit
costs reflect the opportunity costs of using any resources the medical firm
owns.

When determining the economic profit of a firm, economists consider the total
costs of doing business, including both the explicit and implicit costs.
LONG RUN COSTS

Long run economies of scale refer to the concept that average costs fall as a
medical firm gets physically larger due to specialization of labor and capital.

Larger medical firms are able to utilize larger and more specialties in the
various labor tasks involved in the production process.

For example, people generally get very proficient at a specific task when they
perform it repeatedly. Therefore, specialization allows larger firms to produce
increased amounts of output at lower costs.

Another way to conceptualize long run economies of scale is through a direct

relation between inputs and output.
For example, a doubling of all inputs that result in three times as much
output is a sign of increasing returns to scale. Similarly, if a doubling of
output can be achieved without doubling of all inputs, the production
process exhibits long run increasing returns, or economies of scale.
Thank you