The Demand for health and

healthcare - Grossman
Model

Dr Emma Frew Health Economics Unit

Medical School
 Tujuan pembelajaran
 Bagaimana individu mengalokasikan sumber daya
mereka untuk menghasilkan Kesehatan – peran
usia, upah dan pendidikan
 Biaya Modal dan Efisiensi Investasi Marjinal (MEI)
 Memahami cara kerja model Grossman empat
kuadran
Outline

 MEI
 Perubahan keseimbangan karena usia, upah
dan pendidikan
 Penggambaran model Grossman terintegrasi
 Demand for Health Capital (1)
 Individu berinvestasi dalam diri mereka sendiri melalui
pendidikan, pelatihan dan kesehatan. Tujuannya
adalah untuk meningkatkan pendapatan
C = Biaya peluang (biaya alternatif
sebelumnya yaitu suku bunga) + tingkat di mana
barang modal terdepresiasi
C = r + δ
Dua konsep penting: Biaya Modal dan MEI
Biaya modal (c)
 Demand for Health Capital (2)

 MEI – Tingkat pengembalian vs jumlah sumber daya

yang diinvestasikan

Jika tingkat pengembalian barang modal lebih besar

(kurang) dari biaya modal, maka barang tersebut akan
(tidak) dibeli. Barang modal hanya akan dibeli sampai
titik di mana:
Tingkat pengembalian = Biaya Modal
Relationship of healthy days to Health stock

365 days

Healthy
Days

Hmin Health Stock

 Production of Healthy Days
 Kesehatan adalah barang produktif yang
menghasilkan hari sehat
 Stok kesehatan yang lebih besar mengarah ke hari
yang lebih sehat - namun dengan pengembalian
yang semakin berkurang
 Hmin adalah stok kesehatan minimum – produksi
hari sehat pada saat ini adalah nol yaitu kematian
 Natural Maksimal 365 hari
 Optimal Health Stock
Cost of MEI
Capital

r + δ0

Health
H0 Stock
 MEI
 If cost of capital is r + δ0 , then the optimal quantity of
capital is H0, A represents the point of equilibrium

 An x-ray machine that costs £50,000 and has 20 %

rate of return (£10,000) will only be purchased if
(r + δD) ≤ £10,000

 A 2nd machine will only be purchased if its rate of

return ≥ (r + δD)

 Diminishing Marginal Returns to investment - The rate

of return of a 2nd machine would probably be less than
the first, therefore MEI is downward
 Practical questions
 What effect on optimal health stock or demand for
health inputs do the following have:

 Increases in life expectancy?

 Getting a higher salary?
 Going to college?
 Perubahan Keseimbangan - Usia
 The rate at which health stock may depreciate may
increase during some periods of life and decline
during others.

 As an individual ages the δ rate of health stock is likely

to increase (from δ0 to δ1 and finally to δD) i.e. the
health of older individuals is likely to deteriorate faster
than the health of younger individuals.

 Assume that wage and other factors determining MEI

are not substantially altered by aging

 Optimal health stock decreases with age (i.e. H O > H1)

 Changes in Equilibrium - Age
Cost of MEI
Capital
B
r + δD

r + δ1

r + δ0

Health
Hmin H1 H0 Stock
 Perubahan Keseimbangan - Upah
 Wage change will not affect cost of capital (r + δD is
constant)
 Increased wage rate will increase returns obtained from
health days, hence a higher MEI curve i.e.
8 hrs @ £4/hr = £36
8 hrs @ £5/hr = £40

 If original MEI curve represents lower-wage case, then

optimal health stock is HO . MEI2 shows MEI for someone
with higher wages, with higher optimal health stock (H2)
 Optimal health stock increases with level of wages (i.e.
H2 > H0). Benefits of being healthy are
greater for higher-wage workers
 Changes in Equilibrium - Wage
Cost of MEI
Capital
MEI2

C
r + δ0

Health
H0 H2 Stock
 Perubahan Keseimbangan – Pendidikan
 Education improves efficiency in production

 Higher education level raises marginal product of direct

inputs i.e. less inputs are needed to produce a given
amount of investment. A given investment can be
generated at less cost for an educated person , hence
higher rate of return to a given stock of health

 Higher education level means a higher MEI curve

(similar to effect of increased wage rate).

 Optimal health stock increases with level of education

(i.e. H2 > H0). A more educated person will choose a
higher optimal stock of health than the
less educated person.
Changes in Equilibrium – Education
Cost of MEI
Capital
MEI2

C
r + δ0

Health
H0 H2 Stock
The Integrated Grossman Model (1)
Dalam memaksimalkan utilitas tunduk pada waktu
dan uang dalam periode tertentu, konsumen harus:
A. Allocate time between work and leisure

B. Spend remaining leisure time on health and

nonhealth activities

C. Spend income earned on health (medical) and

nonhealth (e.g. baking) resources

D. Produce health capital that may help in future

years
 The Integrated Grossman Model (2)
Quadrant 1
 trade-off tenaga kerja-rekreasi sehubungan dengan alokasi waktu
untuk kegiatan yang menghasilkan upah;
Batasan anggaran (BC-BC) menunjukkan trade-off antara
tenaga kerja dan rekreasi (garis curam menunjukkan
upah yang lebih tinggi)
Slope of indifference curve (U1) menunjukkan trade-off
subjektif konsumen antara waktu luang dan pendapatan
Pembagian optimal konsumen antara kerja pasar (TW) dan
waktu luang adalah titik keseimbangan A – Dengan
asumsi tidak ada hari yang hilang karena sakit (TL), ia
akan bekerja selama (365-OT*) hari dan mendapatkan
penghasilan G * [untuk dibelanjakan pada input medis
(untuk produksi kesehatan) dan input rumah yang baik]
 The Integrated Grossman Model (3)
Quadrant 2

 Trade-off between health investment (I) and home

good (B) given consumer’s income and time

 Consumer divides his time and money in producing I

and B based on his preferences & his productivity

 The Production Possibility Curve (PPC) shows all

efficient combinations of I and B that can be produced
when all of consumer’s income (G*) and time (OT*)
are used to their full potential
 The Integrated Grossman Model (4)
Quadrant 4
 Shows production of either I or B based on his
preferences
 Width of ‘Edgeworth box’ is amount of time remaining
after allocation of time between work and leisure and
height is income that was earned
 Contract curve – shows only combinations that are
efficient for consumer to produce I or B
 If he spends no time or money on health, he spends all
of both on B and is at O; if he spends all his money
(G*) and time (TH=nonwork time) on health, he is
spending none on B and is at southeast corner of box
 The Integrated Grossman Model (5)
Quadrant 3
 Relates medical expenditure (M) to level of health
investment (I)

 If he spends TH time and M* amount of money on

producing health, then I* level of health investment will
be made
 Note that he will spend (OT*- TH) on, and invest B* in,
the home good
 The higher M is, the higher I will be
 Income (£)
II I
BC
Optimal levels of Labour -
Leisure
Health Investment PPC G* Trade-off
and the Home Good A

B* U1

Imax
O TH T* BC

Health
Leisure
Investment I*
contract curve

Medical M*
Expenditure Production of Health
and Health and the Home Good
Investment
Imax
III IV
 Keseimbangan dalam Model Grossman
Terintegrasi
 Consumer picks point A in QI, generating income of G*
and has OT* leisure time.

 From QII, consumer’s equilibrium is at A 1, giving optimal

investment in health of I* and in home good of B*

 In QIV, TH and M* are spent on health care.

 M* is translated through QIII to determine level of

health in investment I*
 Income (£)
II I
BC
Four-Quadrant
PPC G* representation of
A the Grossman
model

A1 B* U1

Imax
O TH T* BC

Health
Leisure
Investment I*
contract curve

M*

Imax
III IV
Key messages from Grossman Model
Untuk memaksimalkan utilitas, konsumen harus:
A. Alokasikan waktu antara bekerja dan bersantai
– Habiskan sisa waktu luang untuk kegiatan
kesehatan dan nonkesehatan
– Belanjakan pendapatan yang diperoleh untuk
sumber daya kesehatan dan nonkesehatan
– Menghasilkan atau berinvestasi dalam modal
kesehatan untuk penggunaan di masa depan
Summary
 Stok kesehatan yang optimal akan menurun
seiring bertambahnya usia seseorang jika tingkat
penyusutan kesehatan meningkat seiring
bertambahnya usia seseorang
Manfaat kesehatan yang baik lebih besar bagi pekerja
berupah tinggi sehingga mereka menuntut stok
kesehatan optimal yang lebih tinggi
Semakin banyak orang yang berpendidikan, semakin
murah biaya untuk menghasilkan kesehatan yang
menghasilkan stok kesehatan optimal yang lebih
tinggi untuk kelompok ini
Individu akan mengalokasikan sumber daya untuk
menghasilkan modal kesehatan.
Conclusions

 Model Grossman telah berpengaruh dalam ekonomi

kesehatan.

Permintaan input perawatan kesehatan adalah

permintaan yang berasal dari permintaan untuk
kesehatan itu sendiri
References
Grossman, M. (1972) On the concept of health capital and the demand for
health, Journal of Political Economy 80: 223-255.

Wagstaff, A. (1993), The demand for health: an empirical reformulation of

the Grossman model, Health Economics 2: 89-198.

McGuire, A., Henderson, J. & Mooney, G. (1988). The Economics of

Health Care. London: Routledge and Kegan Paul

Morris, S., Devlin, N. & Parkin, D. (2007) Economic analysis in health

care. Chichester: John Wiley & Sons

Grossman, M. (1982) The demand for health after a decade, Journal of

Health Economics 1: 1-13

Folland, S., Goodman, A. & Stano, M. (2004). Economics of Health and

Health Care. London: Prentice Hall