Health Care Economics Report: Opportunity Cost & Diminishing Utility

This report delves into the core concepts of health care economics, beginning with an explanation of opportunity cost and its significance in decision-making within the healthcare sector. It emphasizes how the scarcity of resources necessitates choices and the evaluation of alternatives, highlighting the real cost of foregoing potential benefits. The report then transitions to an analysis of diminishing marginal utility in the context of health care, illustrating how each incremental improvement in health quality yields progressively smaller additions to overall satisfaction. The discussion explores the demand for health care as a durable good, relating it to the law of diminishing marginal utility. It also provides real-world examples such as medicine intake and eyeglasses to demonstrate the application of the concept. The report uses a total utility curve to visually explain the relationship between health care consumption and satisfaction and concludes by asserting that the demand for health care services adheres to the law of diminishing marginal utility like any other conventional good. This report is ideal for students studying economics.

Running Head: HEALTH CARE ECONOMICS
Health Care Economics
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1HEALTH CARE ECONOMICS
Table of Contents
Part 1: Opportunity Cost..................................................................................................................2
Part 2: Diminishing marginal utility for health care........................................................................2
Reference list...................................................................................................................................6

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Part 1: Opportunity Cost
Opportunity cost is one of the fundamental costs in economics. This is particularly
helpful in making a cost-benefit analysis of a project. Given scarcity of resources and unlimited
wants, people have to make choices among different mutually exclusive alternatives (Baumol &
Blinder, 2015). People try to make the best choices among the available alternatives. In order to
make one choice, others alternatives have to be sacrificed. Opportunity cost is the cost incurred
from not having the benefits that could have been enjoyed from choosing the second best
alternative. Opportunity cost is defined as the cost of sacrificing potential gain that would have
been derived when one alternative is chosen (Mankiw, 2015). In economics, opportunity cost is
considered as an important economic concept describing relation between scarcity and
alternative choices. The concept is used to ensure efficient allocation of scarce resources (Cowen
& Tabarrok, 2015). The concept of opportunity cost is thus not limited to financial or monetary
cost. It is the real cost of forgone output, lost in time, leisure time, pleasure and any other form of
benefit that offers utility should also be regarded as opportunity cost.
Part 2: Diminishing marginal utility for health care
The law of diminishing marginal utility states that as consumption of a product goes on
increasing additional utility derived from each additional unit of consumption decreases given
the consumption of other products constant (Mankiw, 2015). This is an import concept in
determining demand curve of a particular good. Demand for a good depends on the derived
utility and level of satisfaction. Here, the concept of diminishing marginal utility is discussed in
reference to health care demand.

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Health is considered as a durable good, which is demanded for the purpose of
consumption and investment (Berkman, 2018). When viewed from the perspective of a
consumer, individual desires to be healthy as utility is received from improved quality of life
following a good state of health. The investment aspect of health care is concerned with relation
between time and health (Folland, Goodman & Stano, 2016). A healthy person needs to spend
less time on sickness. Individual with a good health condition can enjoy healthier days to spend
for future work that contribute to income enhancement or other activities.
In order to obtain the demand curve of health care the relation between quantity of health
service and utility needs to be established. The health care stock can be regarded as a durable
good and the demand analysis is subject to law of diminishing marginal utility. When law of
diminishing marginal utility is applied to health care demand then it implies that each additional
improvement in health quality is associated with a smaller addition to total utility. Health care
service is an input in production function because individual uses consumes health care service
for maintenance and improvement in health condition (Berkman, 2018). The law of diminishing
marginal utility in production function of health care indicates that marginal improvement in
condition of health diminishes with increasing consumption of health care service. Total utility
which measures the total satisfaction obtained from consumption of health care services increase
at a decreasing rate (Olsen, 2017). Shape of the total utility curve for health care is explained in
the following figure.

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Figure 1: Total Utility curve of health care
(Source: Folland, Goodman & Stano, 2016)
The total utility curve is bowed shaped because of two reasons. Firstly, every additional unit
leads to a smaller additional improvement in heath condition as compared to the previous unit
following a diminishing marginal productivity in health production function. Secondly, every
additional unit of health care adds to a smaller additional utility because of declining marginal
utility (Berkman, 2018).
There are different instances where health care services constitute law of diminishing
marginal utility. For example, physicians prescribe medicines and those are taken as prescribed
by the doctor. When the patient takes too little quantity of the medicines, then the medicine is not
effective indicating no or little utility derived from consumption (Ward & Calabrese, 2018).
When a patient takes too much quantity of the medicine then there are possibilities of several
serious side effect such as physical harms, allergies and even death. That is increasing medicine
intake would make no additional better off to utility of the individual. People often have more

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than one glass. When people have two or more pairs of glasses then additional utility decreases
with every additional pair of glasses purchased. From the discussion so far has been made, it can
therefore be concluded that like any other normal good the demand of health care services
follows law of diminishing marginal utility in a convenient manner.

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Reference list
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Berkman, E. T. (2018). Value-based choice: An integrative, neuroscience-informed model of
health goals. Psychology & health, 33(1), 40-57.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Folland, S., Goodman, A. C., & Stano, M. (2016). The Economics of Health and Health Care:
Pearson International Edition. Routledge.
Mankiw, N. G. (2015). Principles of Microeconomics, Cengage Learning. Stamford, CT, 213.
Olsen, J. A. (2017). Principles in health economics and policy. Oxford University Press.
Ward, D. M., & Calabrese, T. (2018). Accounting fundamentals for health care management.
Jones & Bartlett Learning.