Aseptic failure

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Unit 3: Medical Care Production and Costs

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services, q. Second, we initially assume only two medical inputs exist: nurse-hours, n, and a composite capital good, k. We can think of the composite capital good as an amalgamation of all types of capital, including any medical equipment and the physical space in the medical establishment. Third, since the short run is defined as a period of time over which the level of at least one input is fixed, we assume the quantity of capital is fixed at some amount. This assumption makes intuitive sense, because it is usually difficult to change the stock of capital than the number of nurse-hours in the short-run. Fourth, we assume the medical firm faces an incentive to produce as efficiently as possible. Finally, we assume the medical firm possesses perfect information regarding the demands for its product. Recall that a production function identifies how various inputs can be combined and transformed into a final output. Thus, the short-run production function for medical services can be mathematically generalized as

q = f(n, k) (2.6)

The short-run production function for medical services in equation (2.6) indicates that the level of medical services is a function of a variable nurse input and fixed capital input. The production function identifies the different ways nurse-hours and capital can be combined to produce various levels of medical services. The production function allows for the possibility that each level of output may be produced by several different combinations of the nurse and fixed capital inputs. Each combination is assumed to be technically efficient, since it results in the maximum amount of output that is feasible given the state of technology. However, both technical and economic considerations determine a unique least-cost or economically efficient method of production. We begin our analysis by examining how the level of medical services, q, relates to a greater quantity of the variable nurse input, n, given that the capital input, k, is assumed to be fixed. Various microeconomic principles and concepts relating to production theory are used to determine the precise relation between the employment of the variable input and the level of total output. A microeconomic principle from production theory is the law of diminishing marginal productivity. This is about production behaviour and states that total output at first

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increases at an increasing rate, but after some point increases at a decreasing rate, with respect to a greater quantity of a various input, holding all other inputs constant.

Figure (2.8) applies the law of diminishing productivity by showing a graphical relation between the quantity of medical services on the vertical axis and the number of nurse-hours on the horizontal axis.

Fig. 2.8: The Total Product Curve

The curve is referred to as the total product curve, TP, because it depicts the total output produced by different levels of the variable input, holding all other input constant. Notice that the quantity of services first increases at an increasing rate over the range from n1 to n2, from 0 to n1. The rate of increase is identified by the slope of the curve at each point. From the graph, the slope of the total product curve increases in value as the tangent lines become steeper over this range of nurse-hours. Beyond point n1, however, further increases in nurse-hours cause medical services to increase at a decreasing rate. That is the point at which diminishing productivity sets in. Notice that the slope of the total product curve gets smaller as output

0

Nurse-hours (n) Quantity of

Medical Services

(q)

n2

n1

TP

q n

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increases in the range from n1 to n2, (as indicated by the flatter tangent lines). At n2, the slope of the total product curve is zero, as reflected in the horizontal tangent line. Finally, beyond n2, there is possibility that too many nurse-hours will lead to a reduction in the quantity of medical services. The slope of the total product curve is negative beyond n2. In terms of the production decision at the firm level, we have not yet accounted for the specific reasoning underlying the law of diminishing marginal productivity. Economists point to the fixed short-run inputs as the beats for diminishing productivity. For example, when nurse-hours are increased at first, there is initially a considerable amount of capital, the fixed input, with which to produce medical services. The large quantity of capital enables increasingly greater amounts of medical services to be generated from the employment of additional nurses. In addition, a combined effect may dominate initially. The combined effect means that nurses, working cooperatively as a team, are able to produce more output collectively because of labour specialization.

At some point, however, the fixed capital becomes limited relative to the variable input (for example, too little medical equipment and not enough medical space), and additional nurse-hours generate successively fewer incremental units of medical services. In the extreme, as more nurses are crowded into a medical establishment of a fixed size, the quantity of services may actually begin to decline as congestion sets in and creates unwanted production problem. In general, any physical constraint in production, such as the fixed size of the facility or a limited amount of medical equipment can cause diminishing productivity to set in at some point.

SELF ASSESSMENT EXERCISE

Discuss the concepts of diminishing productivity in medical care services.