INTRODUCTION TO HEALTH ECONOMICS NSC 533 UNEC
Lecturer: Prof. Okoronkwo, IL
COURSE DESCRIPTION
Health economics is a branch of economics that deals with the study of how resources are allocated in and
within the economy. It recognizes that resources are scarce and that choices need to be made on how
services will be financed and which services are provided. The need for health economics runs through
the desire to build capacity of health workers to accomplish the demand for appropriate allocation of
scarce resources relevant to the performance of the health sector. Evidence shows that the greatest
problem preventing appropriate delivery of care, improved access to care and the financial viability of the
health system has been the scarcity of trained and seasoned health economists and health care managers.
As a result it has become necessary to provide relevant professional training in order to develop health
economic experts with high academic and professional skills to provide leadership in the health service
delivery. This course is designed to equip nurses with knowledge and skills on issues concerning health
care allocation and to enable them function effectively as partners with other healthcare providers in
making decisions in the health sector.
COURSE OBJECTIVES:
At the completion of the course, students will be expected to:
1. Define economics and health economics
2. Identify economics and health economics concepts applicable to health
3. Discuss the nature and scope of health economics
4. Illustrate demand, and supply curves
5. Describe characteristics of healthcare goods
6 State reasons for market failure in health care
7. Explain the concept of budgeting and allocation of funds to the health sector
8. Discuss issues in health care financing and health insurance
COURSE CONTENT
 Definition of economics and health economics
 Basic concepts of economics and health economics.
 Relevance of health economics.
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 Principles of demand and supply
 Equilibrium Price
 Characteristics/nature of health care goods
 Conditions under which free markets operate
 Concept of Budgeting and allocation of funds
 Health care financing
 Different sources and uses of funds
TEACHING METHOD
Lecture/discussion
EVALUATION
Individual/ group assignments/ presentations 30%
End of course examination 70%
75% attendance is mandatory
BASIC DEFINITIONS OF ECONOMICS AND HEALTH ECONOMICS

Economics is the study of how we satisfy our numerous needs given the scarcity of
resources. Simply put, it is the study of scarcity and choice.

Health economics on the other hand, is the study of how we satisfy our numerous health and
healthcare needs given the scarcity of resources. Simply put, it is the study of scarcity of
healthcare goods and services.

It recognizes that resources are scarce and that choices need to be made about how health
services will be financed, which services are provided and how they are provided.
Basic (health) economic problems of society
There are questions that are of primary concern to (health) economists.
1.
What products or healthcare goods & services to produce?
2.
How to produce the products (the healthcare goods and services)?
3.
For whom to produce the goods and services?
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4.
What quantity to produce?
Basic Economic Concepts

Economy refers to all the economic activities and institutions (i.e. anything involving
scarcity and choice) within a geographically defined area.

Resources – Every item within the economy that can be used to produce and distribute
goods and services. Resources are classified as labour, capital ,and land.

Labour refers to human resources both manual and non manual, skilled and unskilled.

Capital refers to goods that are used to produce other goods or services e.g. machinery,
building and tools.

Land refers to all natural resources. It also refers to almost everything else that does not
fall under labour or capital.
Most resources are not useful to us as individuals but they can be combined to make something
that is useful. This process is called production. Commodities (or production outputs) are the
result of combining resources in the production process. They are either final products which are
then used to satisfy people’s wants or they are intermediate products used to make other
commodities.
In economics the terms utility (for individuals) or welfare (for population) are used to describe
the satisfaction or happiness provided by commodities.
There are three things you can do with a commodity or resource
1. Consumption – describes people using up a commodity in order to increase their utility
(happiness or satisfaction gained) e.g. taking panadol is an example of consumption because it
increases utility by relieving the pain of headache.
2. Investment – people invest because they expect the utility they gain from the final product to
be greater than the utility they gain from directly consuming these resources. This involves an
initial sacrifice followed by subsequent benefit- return on investment (ROI).
3. Exchange – if you do not invest or consume a commodity then you can trade it or exchange it
for some other commodity or resources.
-Scarcity and choice
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Resources are scarce because they have competing uses. The concept of scarcity therefore means
that you have to make a choice. Individuals and groups constrained by scarcity of resources find
that it is better to allocate resources by trading off some items for others. In effect we can’t have
all that we want. Economists put a cost element on merely every choice we make.
Opportunity cost
This is the value of the next best alternative forgone as a result of the decision made. For
example if there are two items you want to buy, you may obtain one of the items and leave the
other (i.e. trade off because of your limited resources).
The opportunity cost of getting the item you bought is the other item forgone. The opportunity
cost represents what is given up.
Read more of opportunity cost on pages 3 & 4 of the health economics text book.
-Scale of preference
This is the ranking of unsatisfied wants in order of importance for the purposes of satisfying
them when circumstances and resources present themselves.
Categorization of economics
There are two ways of categorizing economics micro and macro economics.
Micro economics is concerned with the decisions taken by individual consumers and firms and
with the way these decisions contribute to the setting of prices and output of various kinds of
market. Micro implies small scale
Macro economics is concerned with the interaction of broad economic aggregates such as
general price inflation, unemployment of resources in the economy, the growth of national
output. It is also concerned with the interaction between different sectors of the economy. Macro
means large scale
Can economics be applied to health? Read pgs 1-2 of the text book
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.It is common to view health issues concerning individual and households in mostly medical
perspectives. However, experience has shown that though health care is a medical problem, it
has economic dimensions. .For instance, when a member of our family becomes ill, some or all
members of the household make decisions as where to go for treatment (orthodox, faith healing,
herbal or home) who to consult among able physicians and herbalist, when to go for treatment
and how to go. All these processes entail evaluation of the available options especially with
regards to the benefit (recovery for the sick and reduction of costs).
We are all aware of the scarcity of resources in the health sector. Therefore choices are
inevitably made about what treatments are provided and about who receives treatment i.e. there
is some form of rationing. In the context of limited health care resources, the provision of one
service ‘X’ means that a 2nd service ‘Y’ is displaced. The health gain that we would have
obtained from service ‘Y’ is the opportunity cost of our decision to provide service ‘X’. Since
economics is the study of scarcity and choice; it follows that if economics is relevant anywhere it
should be in health.
Health economics can therefore be defined as the concept of economics applied to health care
and its delivery. It involves the study of the supply and demand of health care resources and the
impact that health care has on the population. It deals with optimal allocation of health care
resources. However, health care has some interesting characteristics which means that the more
basic economic models should be used with caution. None of these characteristics is unique to
health but the combinations of characteristics together have contributed to health economics
becoming a distinct sub discipline of economics. Health economics has moved away from the
main stream of economics by their interest in measuring and optimizing an objectively defined
population health rather than individual health. It has its own theory and encompasses a broad
range of concepts and theories. It deals with how best to allocate health care resources, to which
location or target groups so that the final outcome is the best. The possible target groups include
women, children, elderly and all vulnerable groups. The aim of health economists is often to
inform decision makers so that the choices they make maximize health benefits to the
population. Health economics is not concerned with saving money but with improving the level
and distribution of population health with the resources available.
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Relevance of Health ECO
1. Health contributes to the development of a nation. The two are inseparably tied together. The
health status of a people is usually related to its output. This relationship and how to harness its
gains provides a rationale for studying health economics
2. Health Eco advocates improved health care at lowest cost. There are tools for analyzing
alternative health care programmes or approaches.
3. The study of Health Eco enables us to understand the very intricate relationship and points of
overlap between economics and medicine. Hence it is said to be an interface between both
disciplines.
4. Health Eco advocates for efficient health expenditure allocation. Its study provides planners
with useful insight in providing answers to the 4 basic questions of health care planning while
bearing in mind the trade – offs in attaining the goals of efficiency and equity.
5. Health Eco also looks at personal spending of the population. It analyzes the share of personal
income spent on Medicare and the number of jobs in the health sector. The higher the personal
income of households, the higher the proportion of health expenditure. Health expenditure is
defined as expenditure whose purpose is for health improvement irrespective of its nature or
source.
6. The study of Health Eco reveals the demographic, epidemiological, health and global trend in
disease.
7. Helps to examine the economic desirability of proposed changes in health delivery systems
health care financing, health insurance etc.
8. The study of health Eco facilitates a better understanding of the economic aspects of health
care problems and aids the design of health policies.
9. Equips us with veritable tools for making informed decisions on alternative health
programmes e.g. health reforms, health care financing
10. Helps in analyzing differences in health status within or across nation states.
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