Summary Chapter 1, Introduction (Mattias Fritz)

Скачать 341.98 Kb.
 Название Summary Chapter 1, Introduction (Mattias Fritz) страница 18/22 Дата 08.10.2012 Размер 341.98 Kb. Тип Документы

The budget constraint

Third assumption: Neither health inputs nor consumption activities are costless.

Fourth Assumption: Individuals have only limited resources at their disposal.

Figure 6 illustrates an individual with £40 income spread between two goods, consumption priced at £10 and health input priced at £5. The possibilities of what this individual can do with her £40 are illustrated by this “budget constraint” which indicates all combinations of these goods that will exhaust the individual’s income. The slope of the line indicates the sacrifice needed in one good for an increase in another, and is the price ratio between health inputs and consumption i.e. 5/10.

Figure 7 illustrates the case when the price of both goods miraculously doubles and so the budget constraint shifts in to afford the individual half the original amount. Figure 8 illustrates the case when the price of health inputs doubles but the price of consumption remains the same, so the budget line swivels about its vertical (the good with unchanged price) intercept. Reversing the arrows in Figure 9, we can see what happens when income increases from £40 to £50 that shifts out the budget constraint leaving the slope unchanged.

Recap: Individuals have only limited incomes to finance their life and neither their health production nor other activities are free.

Next we ask: How will changes in factors affect behaviour and demand for health? What would be the result of certain policies?

Consumer equilibrium- interaction of prices, income, and health production opportunities giving rise to an “optimal” combination of health and consumption

Individuals will organize expenditures to give the highest possible level of well-being, with the budget constraints (financial constraint) and production functions (technological constraint) acting as constraints on her behaviour.

Refer to Figure 10 which assembles previous diagrams and includes quadrant 4 to enable linkage between quadrant 3 and 4. Quadrant 2 is the health production function reading health inputs from right to left and quadrant 3 is the budget constraint where shifts south west would indicate increases in the budget. Combining these two, we can see for each health input how much health is produced and with income leftover, how much consumption is affordable. Quadrant 1 illustrates the combination of health and consumption available given the constraints (welfare possibility frontier, or WPF) indicating all combinations that satisfy these constraints. Suppose that the individual exhausts all income on either health inputs or consumption in quadrant 3, this would lead to the endpoints of the WPF. Take for instance 3 units of health inputs which lead to 3.5 health units and leaves 1.6 units of consumption, which is another feasible combination point on the WPF in quadrant 1. A continuation of this process for all combinations of health input and consumption satisfying the budget constraint would end up with depicting the whole WPF as shown in quadrant 1. Considering the WPF, the individual will seek the highest indifference curve, which gives him the highest level of welfare. Point a illustrates the point where IC1, which is the highest IC he can attain while remaining on WPF, is tangent to the WPF. Point b and c are attainable but would mean a lower well-being and IC2 is not attainable since it operates outside the WPF and so is more than this poor individual can afford.

Похожие:

Разместите кнопку на своём сайте:
Библиотека

База данных защищена авторским правом ©lib.znate.ru 2014
обратиться к администрации
Библиотека