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Health Economics > L3 > Flashcards

L3 Flashcards

1
Q

What does the Grossman model look at?

A

How people make choices between health and other goods

see notes

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2
Q

Why is health demanded? What is it a trade-off for?

A

Source of utility

Affects the total time available for production of income & wealth

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3
Q

How is health viewed in production in GM?

A

Individual is modelled as starting life with a ‘stock’ of health
Health is a ‘capital good’; increase in stock of health -> increase in output from increasing the number of healthy (working) days

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4
Q

How can consumption of HC increase health?

A

It uses health inputs to make investment in health capital

Investment -> increase health(/maintenance) -> increase(or sustaining) no. of healthy days

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5
Q

What does the efficiency of consumption in health production depend on? (2)

A

Knowledge and education

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6
Q

How may stock of health vary over time?

A

grow/remain constant/depreciate (see slide 6)

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7
Q

Explain how ‘healthy days’ are produced? What are maximums and minimums?

A

Increase in health stock -> decrease in time sick (T(s)) (returns are diminshing)
Max: 365 days
Min: 0 healthy days (ie. death)

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8
Q

Draw the health-stock vs time diagram?

A

see notes

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9
Q

Explain and draw the leisure time to income diagram?

A 
Assuming T(H) is fixed, productive time T(p) can be split between labour, T(w) and leisure (To) activities
Higher levels of health shift the time constraint outwards (D->D')
Increase health -> increase utility tf higher IC
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10
Q

What is the slope of the IC?

A

The wage rate

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11
Q

Why can health be viewed as a capital good? What is the equation for this?

A 
People invest in their health w. time and money
Cost of capital (C):
C=r+delta
r=opp. cost of investment
delta=depreciation rate
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12
Q

Define marginal efficiency of capital (MEC) in HC? What does this miss out?

A

Rate of return of investment in health, misses out consumption benefit; ie. benefit of enjoying being healthy

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13
Q

When should one invest in health until?

A

Eq. position: MB=MC (of investment)

ie. Rate of return = cost of capital

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14
Q

What 3 factors change the equilibrium at which MB=MC when investing in health?

A

Age
Education
Wage

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15
Q

Explain how age affects the equilibrium position? Draw diagram too! Why does this happen?

A

As age increases, depreciation rate of health increases. Ceteris paribus, this means that the optimum health stock decreases too (diagram shows this)

Happens because increase in CofC (greater spending to maintain) means that the rate of return falls, tf so does optimum health stock

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16
Q

Explain how education affects the equilibrium position? Draw diagram too!

A

Better education leads to increase in efficiency of production, tf marginal product of inputs increases tf less inputs are need to produce same amount tf higher RofR to a given stock of health tf MEC curve shifts outwards

A better educated person will have a higher optimal health stock since they have a higher RofR on their health

17
Q

Explain how wage affects the equilibrium position? Draw diagram too! Why does this happen?

A

Increase in wage -> increase in the VALUE of healthy days, tf MEC shifts out, tf RofR is higher and optimal value of HS increases

18
Q

Draw the integrated Grossman Model.

A

see notes

19
Q

Explain what Q1 of the quadrant shows in IGM? (3 incl. eqn.)

A

Budget constraint:

Shows the combination of health inputs (m) and other consumption that is FEASIBLE, given income and prices

Ratio of goods’ prices = slope of BC

20
Q

Explain what Q2 of the quadrant shows in IGM? (3 incl. eqn.)

A

Consumer preferences and PPF:

Shows preferences by depicting combos of health and other consumption that yield utility levels

Slope of IC = MRS

21
Q

Explain what Q3 of the quadrant shows in IGM? (2) What does the shape of the function show?

A

Production function:

Shows how health inputs are turned into health stock/improvements

Shows that as health inputs increase they yield diminishing effect on the health stock

22
Q

Explain what Q4 of the quadrant shows in IGM? (1)

A

45 degree line:

It reflects the ‘other consumption’ vertical axis to the ‘other consumption’ horizontal axis in a 45 degree line

23
Q

What does the PPF in quadrant 2 show? How is it derived?

A

The maximum health and consumption possible from each feasible combination of health inputs

The budget constraint gives the health input and other consumption feasible levels. From here, the production function transforms the inputs to stock levels, and the 45 degree line reflects the OC to the x axis. The intersection then gives a point on the PPF. Doing this for all points on a given budget set then traces out the PPF.

24
Q

When is utility maximised on IGM?

A

Utility is maximised by consumers who, given their preferences, choose M* health inputs and O* other goods to get utility maximising health levels

25
Q

Summary of what IGM shows?

A

That consumers choose combos of health inputs and other goods/consumption to maximise their utility, their spending on HC inputs -> D for HC

26
Q

Explain how improvements in HC technology work in the IGM? Draw diagram for this.

A

Improvements lead to a decrease in the price of health inputs tf the budget line rotates outward about y-axis, therefore consumer can afford more of M but same amount of OC. This will mean they will purchase more M tf different point on production function, therefore the PPF rotates outward about x-axis. Therefore, utility is now maximised at a higher IC (see notes)

27
Q

3 criticisms of the GM?

A

1) Perfect info. is assumed on: health foresight, depreciation rate of health, effects of the HC and other consumption on health
2) Ignores uncertainty of adverse health problems
3) In truth, consumers don’t fully understand the effects of HC and HC markets so will not act precisely how the model expects

28
Q

3 applications of GM?

A

Leu and Gern (1992) confirm a decrease in health capital with age

Strauss et al. (1993) finds greater education -> improved health (Wagstaff (1986) supports this)

Gerdtham and Johannesson (1999) find that D for health: increases with income and education, decreases with age, urbanisation, being single and being overweight

29
Q

What does Wagstaff (1986) find?

A

A negative correlation between D for medical services and health: challenges belief that HC expenditure can be derived from demand

30
Q

Unusual finding from multiple studies regarding D and age?

A

Multiple studies reject the prediction that there is an increase in Demand for medical services with age

31
Q

Show with a diagram, and explain, how increase in health -> increase in utility?

A

See notes side 1

Health Economics (15 decks)

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