Key Economic Concepts

1
Key Economic Concepts

• Opportunity cost
• Efficiency
• Marginal analysis

2
Opportunity Cost

• The value of forgone benefit which could be
  obtained from a resource in its next-best
  alternative use.

3
An Illustration of Opportunity Cost

• Possibilities for Health Department Expenditure
  in a Year

4
Implications of Opportunity Cost

• 1 Deciding to do A implies deciding not to do B,
  ie value of benefits from AgtB.
• 2 Cost can be incurred without expenditure.
• 3 Value not necessarily determined by the
  market.

5
Efficiency

• Efficiency maximising benefit for resources
  used
• Technical meeting a given objective at
  Efficiency least cost
• Allocative producing the pattern of
  Efficiency output that best satisfies the
  pattern of consumer wants

6
Marginal Analysis

• Efficiency is achieved only by producing/
  consuming something to the point where the
  (opportunity) cost of the last unit is no greater
  than the benefit derived from that unit.
• Requires assessment of relative costs and
  benefits of each marginal addition or reduction
  in production/consumption

7
Example of Marginal Analysis

• Two interventions we can allocate our budget to -
  A and B
• How do we allocate this budget to maximise
  benefits?
• Allocate until MBA MBB. As cost is
  opportunity cost this implies MCA MBA

8
The Margin and the Consumer - Diminishing
Marginal Utility
Utility/Benefit
13.2 13 12 10
MB
No Mars Bars
0 1 2 3 4
9
The Margin and the Producer - Cost Functions

• Fixed Costs Do not vary in short term. Cost
  incurred at zero production
• Variable Costs Vary with output at constant
  rate
• Total Cost Sum of fixed and variable costs
• Average Cost Total cost ? no of units of output
• Marginal Cost Additional cost of producing one
  extra unit of output

10
The Margin and the Producer - Average vs Marginal
Cost
Cost
MC
AC
No of Mars Bars
Qm
0
11
Importance of Marginal Cost - Case of Detecting
Colon Cancer
12
MC MB An Example

• Costs and Benefits of Lung Transplantation

13
Marginal Analysis as a Concept

• Often marginal changes, especially in benefits,
  difficult to calculate
• But, it is thinking behind marginal analysis
  which is important rather than numbers