‫بسم هللا الرحمن الرحيم‬
What Are
Economics
And
Health Economics?
Farid Abolhassnai M.D.
Don’t Panic
Learning Objectives
After working through this chapter, you will be able to:
• explain what economics is and the problems it seeks
to solve
• describe what is meant by efficiency and opportunity
cost
• define and use a number of fundamental economic
concepts
• explain why economics is applicable to health
• define health economics and describe the scope of
health economics
Key Terms
Allocative (Pareto, social) efficiency: A situation in which it is not possible to
improve the welfare of one person in an economy without making
someone else worse off.
Commodities (or production outputs): The results of combining resources in
the production process. They are either goods or services.
Demand (economic): The relationship between the price of a good and the
quantity demanded (economic definition).
Market: Any situation where people who demand a good or service can come
into contact with the suppliers of that good.
Normative economics: Economic statements that prescribe how things
should be.
Key Terms
Opportunity (economic) cost: The value of the next best alternative
forgone as a result of the decision made.
Positive economics: Economic statements that describe how things
are.
Production possibilities frontier (PPF): A graph that illustrates the
different combinations of outputs that are achievable with a limited
set of resources.
Resources: Every item within the economy that can be used to
produce and distribute goods and services; classified as labor,
capital and land.
Utility: The happiness or satisfaction a person gains from consuming a
commodity.
Welfare (or social welfare): The happiness or satisfaction a population
gains from consuming a commodity.
Common Economic Questions
• At what level should hospital user charges be
set?
• Are taxes on cigarettes a useful way of
promoting health through reducing the
prevalence of smoking?
• Which is the more effective method of
increasing the take-up of health services: price
controls or subsidies?
• How should doctors be paid?
Definition of Economics
The systematic study of
resource allocation mechanisms
• It can be applied to any social behavior or institution where
scarcity exists and there is consequently a need for
making choices.
• The behavior of people and institutions in making choices
about scarce resources is to some extent predictable.
• People on the whole act in a way that makes them and their
families better off rather than worse off
Primary Concern of Economics
1.
What products are being produced and in what quantities? (For
example: what types of malarial prevention measures are being provided
and how much of each type?)
2.
By what methods are these products produced? (What resources are
required to produce these malarial prevention measures?)
3.
How is society’s output of goods and services divided among its
members? (Who has access to these measures?)
4.
How efficient is society’s production and distribution? (Can we get the
same amount of protection from malaria using fewer resources? Would
an AIDS awareness campaign be a more effective use of resources than
malarial prevention?)
The ECONOMY
All the economic activities and institutions
(that is, 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
1- Labor: human resources, both manual and non-manual, skilled and
unskilled.
2- Capital: goods that are used to produce other goods or services, for
example machinery, buildings and tools.
3- Land: all natural resources. It also refers to manufactured
consumables (i.e. almost everything else that does not fall under labor
or capital).
Production
Combining resources (that are not useful in
themselves) to make something that is useful
Intermediate
Product
Final Product
Resources
Resources
Production
Production
Commodities
Commodities
Final Product
Utility and Welfare
Satisfaction or Happiness
provided by commodities
Utility
Welfare
The characteristics that distinguish commodities
• Physical attributes
Ice cream and a cup of tea
• Date or time
Ice cream in summer vs. ice cream in winter
• Place
A cup of tea in a fashionable café vs. tea in local
supermarket
What could be done
with a commodity or resource
• Consumption: using up a commodity in order to increase
their utility
• Investment: using up a commodity to make other
commodities for subsequent benefits
• Exchange: trading a commodity for some other
commodity or resource
Alternative Uses of A Resource
Resource or
commodity
Exchange
Production
Other
commodities
Other
commodities
Consumption
Increased Utility
Markets
Any situation where people who demand a good or service
can come into contact with the suppliers of that good.
For it to be a market the buyers and sellers
do not have to physically meet
The Flow of Money, Resources and
Commodities
Households
Consumption
Money
Free Market
Resources
Money
Commodities
Investment
Production
Firms
Price: The amount of money that is exchanged for a commodity
Government interventions in the market
• Levying taxes
• Fixing prices
• Licensing suppliers
• Regulating quality
• Prohibit private demand
• Prohibit private supply
Continuum of Economies
Free
Mixed
Command
Production Possibilities Frontier
Production Possibilities Frontier
(Concave to the origin)
Opportunity Cost
The opportunity cost of an action is:
The level of benefit one would have
got from the best alternative action
Production possibilities frontier for the economy
Opportunity Cost
Efficient, Inefficient, Not feasible
Shift of PPF
Important Conclusions
• If a system is operating inefficiently then it is possible
to produce more commodities and therefore more
welfare with current resources.
• If a system is already operating efficiently, then to
increase the quantity produced of one commodity you
have to reduce the quantity produced of some other
commodity. There is a trade-off, an opportunity cost.
• The only other way that more of every product can be
produced is:
– technological improvement
– an increase in the amount of resources available (such as
an increase in population).
Microeconomics
Microeconomics 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 in various kinds of
market
Macroeconomics
Macroeconomics 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 and
– equity
Positive Economics
Positive economics refers to economic
statements that describe how things are. Such
statements can be:
– universally true;
– true in some circumstances or
– universally false
This can be established through empirical
research.
Normative Economics
• Normative economics refers to economic
statements that prescribe how things should
be.
• Such statements can be informed by positive
economics but can never be shown to be true
or false since they depend on value judgment.
Can economics be applied to health?
• Scarcity of resources
• The provision of one service, X, necessarily means
that a second service, Y, is displaced
• The opportunity cost of providing service X = The
health gain that we would have got from service Y
• It is also important to be concerned about those who
receive the service X
• Economists try to making such rationing decisions
explicit
The Mission of Health Economics
Health economics is not concerned with ‘saving money’
but with
improving the level and distribution of population health
with the
resources available