1、IntroPreviouslyDemand for health care is downward slopingPeople choose amount of health care they receive based on pricePeople choose their health care,but do they choose their own health?Is health something that happens to us?Or do we choose it?We use the Grossman model to explore this questionThe
2、3 Roles of Health(H)Health plays three roles in the Grossman model:1.A consumption good2.An input into production3.A form of stock/capital(an investment)Health as a consumption goodHealth as a direct input into utilityHealth as a consumption good enters directly into utilitySingle-period Utility at
3、time tUt=U(Ht,Zt)Ht=level of healthZt=“home good”Everything non-health that contributes to utilityE.g.video games,time with friends,movie tickets*Note:health health careHealth care is not explicitly in the utility functioni.e.Getting vaccines does not provide utility but staying healthy does Health
4、as a consumption goodTime constraints in the Grossman modelIn a single period,there are only 24 hours in a day to contribute to your utility:=24=TW+TZ+TH+TS Divide total time between:Working TWPlaying TZImproving health THBeing sick TSHealth as a consumption goodTime constraint means time tradeoffsT
5、ime working TW produces income Buy things that contribute to utility(H,Z)but need to spend time in those activities(TH,TZ)Time sick TS does not increase utilityEvery hour spent sick takes away time to do other utility-increasing activities(loss time)Health as a consumption goodThe labor-leisure trad
6、eoffGiven levels of TS and TH,individual chooses how to allocate time between work TW and play TZ.Optimal point decides on indifference curvesWhen health improves,more productive time is available for usePushes time constraint outward(from U0 to U1)Can reach higher utilitiesHealth as a consumption g
7、oodHealth as an input into productionThe three roles of health(H)Health plays three roles in the Grossman model:1.A consumption good2.An input into productionOf health(H)Of productive time(TP)3.A form of stock/capital(an investment)Producing H and ZBoth Health and Home good Z must be produced with t
8、ime and market inputsHt=H(Ht-1,TtH,Mt)Zt=Z(TtZ,Jt)Mt=market inputs for health HEx:weights,treadmillJt=market inputs for home goods ZEx:video games,opera ticketsTodays health Ht also depends on yesterdays health Ht-1This is healths third role as a stock which we discuss laterHealth as an input into p
9、roductionHealth affects production by lowering TSTP=TS=TW+TZ+THHealthier you are,the less time you spend sickTP is productive time spent on useful activitiesIncreased productive time can be reinvested into health(TH)or other useful endeavors(TW,TZ)Only way to reduce sick time(TS)is to improve health
10、Health as an input into productionProduction Possibility FrontierProduction Possibility Frontier(PPF):the possible combinations of H and Z attainable,given an individuals budget and time constraintsStandard economic PPF shows H and Z as substitutesWrong!Why?Maximum Z is minimum HIf individual is at
11、minimum H,they are dead and cannot produce any ZHealth as an input into productionAn INCORRECT PPFProblem pointPPF in the Grossman modelPoint AHmin:no productive timefor work,play,orimprovement of healthPoint B“free-lunch zone”Small improvements in health yield large increases in productive time;can
12、 increase Z without giving up HHealth as an input into productionA CORRECT PPFPPF in the Grossman modelPoint CMaximum Z possibleCant improve health without taking away ZIf try to increase Z by shifting resources,sick time will increase and outweigh gain in resources for ZIncreases in health will not
13、 produce extra time to offset time spent improving healthHealth as an input into productionA CORRECT PPFPPF in the Grossman modelPoint D“tradeoff zone”Increases in H only yield small decreases in sick timeIncreases in H,takes away from ZPoint ESpend all time and money on healthIgnores all home goods
14、Health as an input into productionA CORRECT PPFChoosing optimal H*and Z*Someone who values both H and Z chooses a point between C and E in order to maximize their utilityChooses point FU2 is unattainable given PPF constraintsAt U0,an individual can attain more utilityAt F:U1 and PPF are tangentH*and
15、 Z*are optimal levels of health and home goodsHealth as an input into productionExotic preferences and indifference curvesIf individual only cares about home goods(Z)Horizontal indifference curvesH*and Z*at point CCares only about Health HCares only about home good ZHealth as an input into productio
16、nIf individual only cares about Health Vertical indifference curvesH*and Z*at point EHealth as an investmentThe three roles of health(H)Health plays three roles in the GrossmanModel:1.A consumption good2.An input into production3.A form of stock/capital(an investment)Lifetime of utilityOn any day,an
17、 individual considers not only todays utility U(H0,Z0)but all future utility as well!Health is a stock;some of it carries over each new periodHome good Z is a flow(it lasts for only 1 period)=individuals discount rateA person values utility now more than in the future=individuals lifespan(total numb
18、er of periods)Health as an investmentHealth depreciates over timeSome of yesterdays health lasts to today but notall of itHt=H(1-)Ht-1,TtH,Mt)=rate of depreciationRecall:Ht=health at time period tHt-1=health from previous periodTtH=time spent on health in period tMt=market inputs for health(like che
19、ckups and prescription pills)Health as an investmentMEC curve and investments in healthMarginal Efficiency of Capital(MEC)curve:indicates how efficienteach unit of health capitalis in increasing lifetimeutilityWhen level of H is low,small investments have high returns to productive timeHealth as an
20、investmentCosts to investing in healthOpportunity costForgoes putting money into other investmentsr=interest rate of alternative market investmentDepreciation due to aging()Health must pay a return of at least r+If return is less than r+,then market return beats health investment returnH*=optimal am
21、ount of healthMarginal cost balances with marginal benefit of health investmentHealth as an investmentPredictions of the Grossman modelThe Grossman model helps explain why weobserve:1.Better health among the educated2.Declining health among the agingHealth and educationWell-educated individuals are
22、more efficient producers of healthCollege grads benefits more than a high school dropout.Explanations?MEC and efficiency of health investmentBetter educated aremore efficient at eachlevel of healthinvestmentMECC MECHH*C is higher than H*HMECC=college graduateMECH=high school dropoutPredictions of th
23、e Grossman modelThe Grossman model helps explain why weobserve:1.Better health among the educated2.Declining health among the agingDepreciation of healthRecall:Ht=H(1-)Ht-1,TtH,Mt)Depreciation is not constant increases with ageAs increases,costs(r+)increase and it takes more resources to maintain sa
24、me level of healthAs a result of increasing depreciation over time,optimal health H*also declines over time!Optimal death in the Grossman modelBecause of rising depreciation,there are better investments in the market than the individuals healthH*eventually reaches HminWhy would anyone choose Hmin?Ho
25、w is Hmin utility-maximizing?ConclusionIs health something that happens to us or is chosen?Grossman model says it is chosenIn fact,we even choose when we dieWhile that may seem far-fetched,Grossman model a useful tool for understanding the roles and tradeoffs of health Next we use the Grossman model to understand empirical findings about the relationship between socioeconomic status and health
