Production Theory Flashcards
1.
What is production theory?
Production theory examines how firms transform inputs into outputs to meet their objective
What is an input?
Any good or service used to produce output
What is the production function?
A mathematical relationship between outputs and inputs, where quantity is a function of land, labour and capital
What is the total product?
The total output of a product per period of time obtained from a given number of inputs.
Draw a production function when land and capital are fixed. Describe its shape.
What is the average product?
The total output per unit of the variable factor
What is the marginal product?
The extra output gained by the employment of one more unit of the variable factor.
Demonstrate that production in the short run has diminishing returns.
When increasing the variable input by one unit each time, the output increases by less each time.
How can the law of diminishing returns relate to healthcare?
Morris et al. (2012) present data from the World Bank that shows that increasing healthcare expenditure has a positive relationship with life expectancy up to around $4000 per capita, when increasing expenditure beyond this correlates with no further increases in expectancy. Therefore, there are diminishing returns of life expectancy with increasing expenditure.
What are the two opposing views of healthcare output?
- That health is the ultimate output of healthcare facilities
- That health care is the intermediate output that people consume to produce health.
Draw an isoquant curve. Describe its shape.
An isoquant looks similar to an indifference curve. It compares all technically efficient combinations of two inputs to produce an output. It is convex to the origin, and the further from the origin, the higher the output.
What determines the slope of an isoquant curve?
The marginal rate of technical substitution
Define the marginal rate of technical substitution
The rate at which one input can be substituted for another while holding output constant
Draw an isocost curve. Describe what it shows.
It shows the possible combinations of the two factors of production that cost the same to employ.
What determines the slope of the isocost curve?
The ratio of prices of each input.
Using a isocost/isoquant approach, show where the point of maximum output is.
The point of optimal output is where the isocost curve is tangential to the isoquant line (Point B). This allows the highest possible output to be achieved. Point A would not be chosen as it is on a lower isoquant than B. C would not be chosen because it is beyond what is affordable.
Show what happens to the maximum output of production if there is an increase in wages.
If there is an increase in wages, the isocost curve will pivot and the new maximum isoquant will be lower.
Which curve shows how substitutable the two inputs are?
The isoquant line
If there is no substitutability between inputs, what will the isoquant curve look like?
It will have a right angle
How can an isoquant/isocost diagram be used to minimise cost?
The isocost of a given budget can be used to find the isoquant curve it is tangential to, to maximise output/
What is technical efficiency?
Producing the most possible outputs for the least possible inputs
What is cost efficiency?
When production at a given output is at the least possible cost
Define elasticity of substitution.
The responsiveness of a firm to changes in factor prices, which is dependent on the possibility of substitution.
What is the usefulness of finding elasticity of substitution in healthcare?
It can be used to reduce cost and relieve shortages of certain specialities/treatments if you can substitute between inputs for the same output - informing resource allocation.
Jensen and Morrisey (1986a) calculated the substitution elasticities between physicians, nurses, beds and residents, finding there is substitutability between these factors of production which has implications when trying to allocate resources (e.g. in a shortage nurses, they can be substituted for medical residents). They also find that the presence of physicians increase productivity of other inputs.
Jensen and Morrisey (1986b) calculated elasticities of substitution between physicians with different specialities, nurses, other staff and beds. They found limited substitutability of surgeons (elasticity of <1), but a high elasticity of substitution between nurses and primary care doctors.
