Economic Analysis in Healthcare by Stephen Morris & Nancy Devlin & David Parkin & Anne Spencer

Author:Stephen Morris & Nancy Devlin & David Parkin & Anne Spencer [Morris, Stephen]
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-09-17T23:00:00+00:00

Using these concepts we can derive the demand curve for health care labour. An employer will maximise its profits when the marginal cost of employing an additional unit of labour equals the marginal revenue that the worker's output earns for the firm. This is analogous to the profit maximisation level of output given by MC = MR in the goods market. The marginal cost of labour MCL is the extra cost to the employer of employing one more worker. As noted, under perfect competition the employer faces a horizontal supply curve and the additional cost of employing one more worker is the wage rate, .

The marginal revenue from employing an additional unit of labour is the marginal revenue product of labour MRPL, which is the marginal product of labour multiplied by the marginal revenue from selling one more unit of output, . If employing an extra nurse means that the hospital can provide 10 more operations per week and the hospital earns £2 000 for each operation then the extra nurse adds £20 000 to the hospital's revenue each week, which is the nurse's MRP.

An MPL curve is shown in Figure 8.2(a). The law of diminishing marginal returns means that as more nurses are employed there will come a point when diminishing returns set in. On the figure this occurs at QDR and the MPL curve slopes downwards beyond this point. The MRPL curve in Figure 8.2(b) has a similar shape to the MPL curve since it is the MPL curve multiplied by a constant amount. Combining the marginal costs and marginal revenue of labour, the employer maximises profits when employing the number of nurses where .

Figure 8.2 Deriving the demand curve for nursing labour

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