You just started working as a Health Service Manager within one of the following health care industries.  First choose an industry below to discuss the questions that follow:

  1. Ambulatory Surgery center
  2. Pharmacy
  3. Physician’s Office
  4. Cosmetic Surgery Center
  5. Laser Eye Center
  6. Dental Office

Your boss has asked you to write a report detailing how the demand for your product(s) is impacted by various economic factors.  In writing your memo, be sure to include your name and in the subject line identify the health care entity you chose above. In order for your boss to easily review your memo, please include section headers to correspond to the questions below.

Answer the following questions relying primarily on the course readings and other resource material presented in this class (do not cite any other outside sources).

  1. Describe a product or service your company provides to your patients
  2. Evaluate the demand curve for your product and relationship between the price of your service/product and the quantity demanded.

In this evaluation, be sure to identify:

  • whether demand is sensitive (e.g. elastic) or less sensitive (e.g. inelastic) to changes in the price and
  • evaluate why this relationship might occur.
  • include a discussion of how the existence of health insurance would impact the elasticity of demand.
  1. Define “substitute” goods and identify potential substitutes for your product/service. Evaluate how does the existence of a substitute impact the demand for your product/service.
  2. Define “complement” goods and identify potential complements for your product/service. Evaluate how does the existence of complement goods impact the demand for your product/service.
  3. Identify and discuss the economic factors that might lead to a shift in the demand curve for your product/service?


Week 4: The Supply Side: Importance of Costs



Understand difference between accounting vs. economic costs

Understand characteristics of cost in short-run vs. long-run and impact on:

Average vs. marginal

Input specialization

Diminishing returns

Understand what costs matter for a firm’s pricing decision

Breakeven vs. shut-down prices

Understand what factors constitute a “perfectly competitive” market

Key Learning Objectives Week 4


Economic costs include the “opportunity” cost of inputs used in the production process

Economic Cost = Explicit cost + Implicit Cost

Accounting Cost = Explicit cost

Explicit cost : actual monetary payments for inputs

Implicit cost: opportunity cost of inputs that do not require a monetary payment

Applies to Profit Equation as Well

Economic Profit = Total Revenue minus Costs (Explicit + Implicit)

Accounting Profit = TR minus C (Explicit only)

Accounting vs. Economic Costs and Profits


From Week 1 introduced the concept of factors of production also called input into the production process

Labor- Doctors, nurses, administrative staff, etc.

Physical capital – Hospitals, doctor’s offices, medical technology, etc.

Natural Resources and Raw Materials – land for the capital to be built, energy sources (oil and gas), raw materials for pharmaceuticals

Entrepreneurship – scientists who develop cures for cancer, drug companies who develop new drugs.

Production Function: Relationship between Inputs (e.g. labor, capital) to and Outputs (e.g. patient care) from the production process

Factors of Production in Healthcare


Production Function and Time

Short-run: period of time in which firms are able to vary one of the inputs to production

Long-run: period of time in which firms can vary all inputs to production

All inputs are variable in long-run, you can hire and fire labor, you can build more physicians offices and hospitals

Thus, the production function is largely a short-run decision

Within the Short-Run timeframe, firms do face different stages of production based on how much output (and marginal product) they can get from a given input (e.g. labor).

The Production Function and Time


Increasing returns (Marginal Product (MP) > Average Product (AP)

Each additional worker contributes more to their output.

Example: New physician office with a number of exam rooms and one physician


Week 3: The Demand for Health Insurance



Understand how health insurance markets work and the role of risk and risk mitigation

Understand potential market failures in health insurance markets

Understand the impact of health insurance on the demand for health care

Understand how deductibles and copays improve price sensitivity

Key Learning Objectives Week 3


Uncertainty exists when any number of events may occur and we do not know which one will arise.

Risk exists when the probability of each even can be estimated

Expected value(EV) = probability of event occurring * expenditure of health care treatment

Understanding Risk and Uncertainty


Fair and unfair gamble

A “fair” gamble is when EV profit = 0

An unfair gamble where EV of profit <0

A favorable gamble is where EV of profit > 0

Risk Averse Individual will refuse a “fair” gamble

The more risk-averse an individual is the more favorable the gamble must be

Risk-Neutral is indifferent between accepting and not accepting a fair gamble

Risk Loving individual will accept a fair gamble and may even accept non-fair gamble

Attitudes Toward Risk


Health care is consumed under the condition of uncertainty with respect to:

The timing of health care expenditures

Costs of health care spending

This uncertainty poses a “risk” of incurring large unplanned health expenditures due to ill health

Health expenditures for catastrophic care (heart surgery, etc) are quite high

Some individuals are more “risk averse” than others

Risk and Uncertainty in Health Care


Health insurance is:

Used to mitigate risk

Represents a contract between an insurance provider and an individual

Pay an agreed upon price for health insurance (called a premium)

In exchange for payment for all or portion of health care costs

Role of Health Insurance


Group (employer-sponsored) market

Employers purchase policy from insurers and offer to employees

Covers almost 70% of working adults

Employers pay large share of premiums, as a result, participation rate very high so risk is spread across large group

Individual market

Individuals purchase policies directly from insurers

Risky individuals or those needing care more likely to purchase policies

Participation rate low

Markets for Health Insuranc