Health Budget and the Production Possibilities - Essay Example

Health Budget and the Production Possibilities Curve The analysis of how production changes with the change in inputs or budgets is a scope of Microeconomics. We use the term production possibilities curve to mean the "curve that shows the combinations of two goods that can be produced with fixed quantities of inputs" (Robert S. Pindyck). Supposing that the two health care goods that the government produces are hospital and medicine and the two inputs are labor (composed of the nurses, doctors and other medical practitioners) and the capital (the machines and equipments), the production possibilities curve is depicted as below: We have Hospital on the Y axis and medicine of the X axis.

Point A represents one extreme, in which only hospitals are produced given the fixed inputs. Point D, on the other hand represents the other extreme in which only medicines are produced. The points B and C represent a combination of both hospital and medicine. The points inside the curve represent inefficient production allocation such as point E, while points above the curve represent allocations which are greater in amount than the other points but not feasible given the current amount of inputs.

This is where the increase in budget will matter. Simply, with the increase in budget, the inputs to production can be increased so that production will also increase. This is shown in the graph below: The increase in budget, which would allow the government to improve the number of inputs, say labor and capital, will cause a shift of the production possibilities curve outward so that higher output combination of both hospital and medicine can be achieved. With the shift of the PPC, point F can now be achieved.

Works Cited Robert S. Pindyck, Daniel L. Rubinfeld. Microeconomics. Singapore: Pearson Education Asis Pte. Ltd, 2003.