Health 2 Demand for Health Care

Health plays 3 roles:

• A consumption good
• An input into production
• A form of stock (investment).

Production functions:

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  • Ht-1 = health a period t-1 (past health)
  • M = market inputs for health e.g health care
  • J = market inputs for Z e.g. video games.

Time
Only 24 hours in the day. 

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• Ts - does not contribute to H or Z = does not increase utility. Individual cannot choose it. Determined by H

Budget

If an individual work, total income for each t is: 

Budget constraint:

Time and budget - not independent. Linked through decisions about Tw. E.g. more healthy means less T and more productive time. 

• Choice between Tw and Tz.
• When health improves = more productive time in available.
  • pushes constraint outwards
  • can reach higher utilities. 

• All combinations of H and Z attainable given the budget and time contstraints:
  • A - no productive time for work, play of health.
  • B- "free lunch zone". Small improvements in H produces large improvements in productive time. Can increase Z without giving up too much of H. Diminshing marginal returens to productive times from health.
  • C- One extra hour spent of H produces one extra hours in productive time. Max Z. Cant't improve H without taking away Z.
  • D- "trade off zone". Increases in H only yeild small decreases in sick time. Takes away from Z.
  • E- All time and money spent on H.

• F is optimal
  • U2 is attainable
  • U0 can get a higher utility 
  • U1 and PPF are at a tangent. Highest utlity possible. 
• H* and Z* is the optimal levels of H and Z
  • H*<Hmax - willing to give up H for other goods.
  • Z*<Zmax - values H aswell.

People make tradeoffs that lead to less than Hmax.

Only cares about Z                                                                            Only cares about H

• Horizontal indifference curves                                                      Vertical indifference curves
• Z* and H* at point C                                                                      Z* and H* at point E
• Still resonable level of H, at H=0, =dead
  =no time for Z.

An indivdual considers future utilty aswell:

     - discount rate. Values utility now more than in the future.
     - lifespan (total number of periods)

Health in an investment good - a form of human capital. It depreciates over time. Production function:

    - rate of depreciation - how fast H dissipates between periods.

Marginal Efficiency of Capital (MEC) curve: indicates how efficient each unit of health capital is in increasing lifetime utility. 

When H is low, small improvements have high returns to productive time. 

• Oppurtunity cost
  • individuals forgo putting money into other investments.
  • Measured by r = interest rate of alternative market investment.
• Depreciation - due to ageing 
  • Health ust pay a return of atleast 
  • If return is less, than the market return beats health investment return.
  • H* - marginal cost balances with marginal benefit of health investent.

Been used to study 2 issues:

• Why better health is concentrated among better educated?

Example
College graduates (MECc) vs. High school dropouts (MEC). Same preferences towards labour and lesuire 

• Declining health among ageing

    is not constant - increases with age.
       increases and it takes more resources to maintain same level of health.

As a result H* declines.

Increasing     makes it less and less attractive to invest in
scarce recources in health. More reckless in old age.