WHAT IS ECONOMICS?
the science of scarcity, it analyses how choices are structured and
prioritized to maximize welfare within constrained resources.
he studies of distribution of scarce resources commonly known as
goods and services across a population
analyses how choices are structured and prioritized to maximize welfare within
constrained resources.
economics is the study of distribution of scarce resources commonly known as
goods and services across a population.
The discipline of economics deals with use of scarce resources to satisfy human
wants and needs how best to use the resources available.
How does the economy affect health care?
according to World Health Organization's (WHO) constitution
health is
'a state of complete physical, mental and social well-being and. not merely
the absence of disease or infirmity ‘.
Caring for a child with a mental disability cost more than caring for a child
with a physical disability. (true).
--? Definition of Health Economics
Health economics is the study of how scarce resources are allocated among
alternative uses for the care of sickness and the promotion, maintenance and
improvement of health.
The future of health economics depends heavily on how well health economists
carry out two distinct albeit related missions:
1- enhancing understanding of economic behavior
2- providing valuable input into health policy and health services research
iHEA’s mission is to:
1- Increase communication among health economists.
2- Foster a higher standard of debate in the application of economics to health
and health care systems.
3- Assist young researchers at the start of their careers.
Principles of health economics including:
Production, resources, scarcity and opportunity cost.
Incremental analysis: means that the effects of changes in the use of resources are
examined according to how they differ from current use?
‘marginal’: means at the margin of an existing set of circumstances.
Equity is always an important criterion for allocation of resources.
(important policy objective in almost every health care system in the world.)
in order of priority ( )االولويةthese are:
1. Equal life chances.
2. Equal concern for people’s needs
3. Meritocracy
Opportunity cost
Opportunity cost is the benefit that is missed or given up when an investor,
individual or business chooses one alternative over another.
Scarcity The situation in which unlimited wants exceed the limited resources
available to fulfill those wants.
Production possibilities frontier (PPF) A curve showing the maximum attainable
combinations of two products that may be produced with available resources and
current technology.
Opportunity cost the highest-valued alternative that must be given up to engage in
an activity.
Comparative advantage The ability of an individual, a firm, or a country to produce a
good or service at a lower opportunity cost than competitors.
The Market System
1- Market
2- Product markets
3- Factor markets
4- Factors of production
The Circular Flow of Income: Two key groups participate in markets:
1- A household consists of all the individuals in a home.
2- Firms are suppliers of goods and services.
Circular-flow diagram A model that illustrates how participants in markets
are linked.
Free market A market with few government restrictions on how a good or service
can be produced or sold or on how a factor of production can be employed
.
Entrepreneur: Someone who operates a business, bringing together the factors of
production—labor, capital, and natural resources—to produce goods and services.
Property rights: The rights individuals or firms have to the exclusive use of their
property, including the right to buy or sell it.
Perfectly competitive market A market in which there are many buyers and sellers,
all the products are identical, and there are no barriers to new sellers entering the
market.
The Demand Side of the Market Demand Schedules and Demand Curves
1- Demand schedule
2- Quantity demanded
3- Demand curve
4- Market demand
Law of demand: The rule that, holding everything else constant, when the
price of a product falls, the quantity demanded of the product will increase,
and when the price of a product rises, the quantity demanded of the product will
decrease
What Explains the Law of Demand?
1- Substitution effect the change in the quantity demanded of a good that results
from a change in price.
2- Income effect the change in the quantity demanded of a good that results from
the effect of a change in the good’s price on consumers’ purchasing power.
The Demand Side of the Market
1- Many variables other than price can influence market demand. Income:
Normal good, Inferior good
2- Variables That Shift Market Demand Price of related goods, Complements,
3- Tastes
4- Population and demographics: Demographics
5- Expected Future Prices
6- Quantity supplied: The amount of a good or service that a firm is willing
and able to supply at a given
price.
The following are the most important variables that shift supply:
Prices of inputs, Technological change, Prices of substitutes in production Number of
firms in the market, Expected future prices.
Market Equilibrium: Putting Demand and Supply Together:
Market equilibrium: A situation in which quantity demanded equals quantity
supplied.
Competitive market equilibrium A market equilibrium with many buyers and many
sellers.
What is market? People who demand good come together with suppliers.
Price? The amount of money exchanged for goods
Price influencers? Competitors, Deprivation, Inflation, Government
intervention.
How healthcare is funded?
Social insurance, Social insurance, Out-of-pocket.
Functions of Healthcare Systems
Revenue collection, Fund pooling, Purchasing
The issue of how expenditures may change in response to increased charges
depends on 3 factors:
How big is the increase of charges in comparison to what people face today
Whether they apply to all services.
Who elects to reduce visits to providers.
Health financing models by country
Netherlands, Germany, Singapore, USA, UK.
Main challenges in healthcare?
Rising expenditure, Chronic diseases, New technologies/medicines.
Paying providers: Capitation, Fee for service, Pay for performance, Budget, DRG.
Understanding the different types of healthcare markets and the way suppliers and
consumers interact is important for several reasons:
1- To assess pros and cons of introducing competition on market.
2- To assess introduction (or extension) of user charges.
3- To assess introduction (or extension) of user charges.
There are many types of markets:
1- Competitive market: no regulation or intervention by the government (free
market).
2- Controlled market: the government directly regulates how goods and services
and labor may be used priced and distributed.
Competitive market can only operate efficiently if a number of conditions are met:
Producers selling the same product.
Many sellers and buyers.
No restrictions on potential sellers entering the market.
Buyers and sellers are well informed on prices.
Generally unregulated health care market may fail for the following reasons:
Adverse selection, Moral hazard, Market segmentation, estimating current and
future claims is difficult, Communicable diseases.
The healthcare market is characterized by a number of market failures:
Monopoly, Externalities, Asymmetry of information.
Monopoly is a single supplier on the market and can occur as a result of the
following conditions: There are barriers to entry, there are few providers,
There are few close substitutes
Market failure may occur when there are externalities:
1- Negative - pollution, smoking, communicable diseases
2- Positive – vaccination
Generally unregulated health insurance market may fail for the following reasons:
Adverse selection, ‘Uninsurable’ population, Moral hazard, Market segmentation
Moral hazard (consumer): Occurs when informed person, after the transaction is
complete, uses the information for the disadvantage of another person
To avoid consumer moral hazard, insurers:
1- adjust their premiums to individual risk
2- Adjust prices annually, considering individuals’ service consumption history
Moral hazard (Provider): Occurs when a provider over-supplies services to maximize their
income if the third-party payer (insurer) is involved in the process.
Control how providers are paid (budgets, capitation, performance based incentives).
1. Economic growth is an increase in the level of production of goods and services by a
country over the period of time.
2. Gross Domestic Product (GDP) is an indicator that measures the size or output of an
economy. It is a total value of goods and services produced within one year in a
country.
3. Gross National Product (GNI) measures the economic activities undertaken by
citizens and firms in the country
4. Purchasing Power Purity (PPP) adjustment of the price of an identical goods and
services in different countries
5. What is macroeconomics? the relationships between economic growth, output,
6. GDP is the main indicator that is used to measure the size or output of an economy.
Macroeconomic concepts
1- Inflation – general rise in prices through a period of time, which results in a
decrease in the value of money (refer to ‘current dollars’ and ‘constant dollars’
when discussing inflation.)
2- Price index – measures the inflation rate, it is created by defining which goods
are frequently purchased by households, these goods are placed into the virtual
basket and their prices are monitored. (Economists measure inflation using a
price index)
3- Exchange rate – refers how much one country’s money is worth in another
country’s currency. (Payments made to other countries are seen as debits (e.g.
imports), and payments received from other countries are seen as credits (e.g.
exports).
4- Balance of payments (BOP) measures flow of money between countries
International trade
According to the ‘law of comparative advantage’, free trade between countries is
justified because it encourages countries to export goods that they are best at
producing – i.e. specialization.
The problem of course is that, in practice, many countries create
barriers to trade to? ‘protect’, domestic industries (– )الصناعة المحلية
barriers such as tariffs, import restrictions and bans.
Why would a country do this? Usually it is to protect a specific interest
group.
Globalization: Tendency of investment funds and businesses to move
beyond domestic and national markets to
other markets around the globe:
Increases the interconnection of the world.
Increases international trade and cultural exchange.
Macroeconomics and risk factors for disease
social determinants of health’, which refer to
the general conditions in which people live and work and which
influence their ability to lead healthy lives or not.
factors such as employment, nutrition, environmental conditions and
education.
Communicable diseases
the spread of communicable diseases takes place in two ways.
1- the overall environment in which people live
2- the increased international movement of people, animals and
goods associated with increased trade will affect the movement
of disease.
