Chapter-1 Introduction To Economics

Gizachew Tilahun (Assitant Professor)
Jimma University
Institute of Health
Faculty of Health Sciences
School of Pharmacy
Introduction to Pharmacoeconomics, Jimma University
By: Gizachew T. slide 1
Introduction to economics

Introduction Definitions….
. . . The word economy comes from a Greek word “Oikonomia” for “one
who manages a household.”
 Economy-System where scarce resources are allocated among
alternative uses
 Households and economies have much in common.
 A household must allocate its scarce resources among its various
members, taking into account each member’s abilities, efforts, and
desires.

 The management of society’s resources is important because resources are
scarce.
 • Scarcity means that society has limited resources and therefore cannot
produce all the goods and services people wish to have.
 • A household cannot give every member everything he or she wants,
 Similarly a society cannot give every individual the highest standard of
living to which he or she might aspire.

 Society and Scarce Resources:
 The management of society’s resources is important because resources are
scarce.
 Scarcity implies choice and choice implies cost.
 Scarcity. . . means that society has limited resources and therefore cannot
produce all the goods and services people wish to have.
 E.g. Radiation therapy for Cancer patients in Addis

Economics is the study of how society manages its
scarce resources.
1. The science of household affairs, or of domestic
management.
2. Political economy; the science of the utilities or the
useful application of wealth or material resources.
 Utility (Polit. Econ.) Adaptation to satisfy the
desires or wants; intrinsic value

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 Mankiw’s definition
 How Society manages its scarce resources
 Hedrick’s definition
 How society chooses to allocate its scarce resources among competing
demands to best satisfy human wants
 Alternative definitions
 Economics is the study of choice.

 The science that deals with the production,distribution, and consumption
of goods and services, or the materialwelfare of humankind.(Dictionery
definition)
 Economists studies
 How people make decisions.
 How people interact with each other.
 The forces and trends that affect the economy as a whole.

Scarcity and the Fundamental Questions of Economics
 Scarcity : Unlimited wants versus limited resources
 Choices and tradeoffs
 Opportunity Costs
 All societies must answer the WHFM questions
 What is to be produced?
 How is to be produced?
 For whom will it be produced?

Economics is about …
 Limited resources
 Unlimited “wants”
 Choosing between which

‘wants’ we can ‘afford’
given our resource
‘budget’
Economics is about choice
Good ‘B’
Good ‘A’
Budget

Economists view of the world...
 Pessimist: bottle ½ empty
 Optimist: bottle ½ full
 Economist: bottle ½ wasted
inefficient!

Definition of terms
1. Utility
 Utility is the amount of satisfaction to be obtained from a good or service at a

particular time.
 • For example the utility of orange is the satisfaction derived from consuming it
at a particular time.
 There are some points to note:
 i. whether a good is useful or not, so far it gives satisfaction to the consumer, it has
utility for him.
 ii. If a consumer wants something whether it is good or bad for him it has utility for
him. it may satisfy socially immoral wants E.g. Drug, alcoholism, etc.
 iii. Utility of a good varies from person to person and it varies for the same person
from time to time.
Definition of terms
2. Value
 Intrinsic worth or price of a good or service.

 Earlier economic writers from ARISTOTLE made the distinction between
VALUE IN USE and VALUE IN EXCHANGE (prices) with, in many cases,
the objective use value being measured by the cost of production of that
article.

Definition of terms
Efficiency Vs Equity
 Efficiency v. Equity
 Efficiency means society gets the most that it can from its scarce resources.
 Equity means the benefits of those resources are distributed fairly among the
members of society.
 Redistribution: Equity versus Efficiency - can you have your cake and eat it
too?

Ten principles of economics
 How people make decisions
1. People face tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
 How people interact
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments Can Sometimes Improve Market Outcomes.
 How the economy as a whole works
8. The standard of living depends on a country’s production.
9. Prices rise when the government prints too much money.
10. Society faces a short-run tradeoff between inflation and
unemployment.

Ten Principles of Economics
(A) How People Make Decisions
 (1) People face tradeoffs.

 “There is no such thing as a free lunch!”

Ten Principles of Economics
(A) How People Make Decisions
 (1) People face tradeoffs.

 “There is no such thing as a free lunch.”
 To get one thing that we like, we usually have to give up another thing that we
like. Making decisions requires trading off one goal against another.
 Ex. Consider a student who must decide how to allocate her most valuable
resource— her time.

…Trade-offs…
 To get one thing, we usually have to give up another thing.
 Guns vs. butter
 Food vs. clothing
 Leisure time vs. work
 Efficiency vs. equity
Making decisions requires trading

off one goal against another.

…Ten Principles of Economics
(A) How People Make Decisions…
 (2) The cost of something is what you give up to get it.

 Because people face tradeoffs, making decisions requires comparing the costs
and benefits of alternative courses of action
 Consider, for example, the decision whether to go to college
 What are the benefits?
 What are the costs ?

Principle #2: The Cost of Something Is What You Give Up to Get It.
 Decisions require comparing costs and benefits of alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in?
 The opportunity cost of an item is what you give up to obtain that item.

Principle #2: The Cost of Something Is What You Give Up
to Get It.
 Basketball star LeBron
James understands
opportunity costs and
incentives. He chose to
skip college and go
straight from high
school to the pros
where he earns millions
of dollars.

 (3) Rational people think at the margin.

 Economists use the term marginal changes to describe small incremental
adjustments to an existing plan of action.
 For example, consider an airline deciding how much to charge passengers
who fly standby. Suppose that flying a 200-seat plane across the country costs
the airline $100,000.
 What is the marginal cost of flying a standby passenger?
 the marginal cost is merely the cost of the bag of peanuts and can of soda that
the extra passenger will consume.

• (4) People respond to incentives.

 Because people make decisions by comparing costs and benefits, their behavior may
change when the costs or benefits change. That is, people respond to incentives.
 Public policymakers should never forget about incentives, for many policies change the
costs or benefits that people face and, therefore, alter behavior.
 A tax on gasoline, for instance, encourages people to drive smaller, more fuel-efficient
cars.
 It also encourages people to take public transportation rather than drive and to live
closer to where they work.

 Example: Seatbelt policy ….. Reduced number drivers death and increased
number of accidents and increased number of pedestrian death

HOW PEOPLE INTERACT
 Trade can make everyone better off.
 Markets are usually a good way to organize economic activity.
 Governments can sometimes improve economic outcomes.

…Ten Principles of Economics..
(B) How People Interact
 (B) How People Interact

 (5) Trade can make everyone better off.
 Countries as well as families benefit from the ability to trade with one
another. Trade allows countries to specialize in what they do best and to enjoy
a greater variety of goods and services.

 (6) Markets are usually a good way to organize economic activity.

 Communist countries worked on the premise that central planners in the
government were in the best position to guide economic activity
 In a market economy, the decisions of a central planner are replaced by the
decisions of millions of firms and households.
 Firms decide whom to hire and what to make. Households decide which
firms to work for and what to buy with their incomes.
 These firms and households interact in the marketplace, where prices and
self-interest guide their decisions.

 Market economy is an economy that allocates resources through the

decentralized decisions of many firms and households as they interact in
markets for goods and services
 Households and firms interacting in markets act as if they are guided by an
“invisible hand”( Adam Smith 1776)

Principle #7: Governments Can Sometimes
Improve Market Outcomes.
 Markets work only if property rights are enforced.
 Property rights are the ability of an individual to own
and exercise control over a scarce resource
 Market failure occurs when the market fails to
allocate resources efficiently.
 Market failure can be viewed as a scenario in
which individuals' pursuit of self-interest leads
to bad results for society as a whole
 When the market fails (breaks down)
government can intervene to promote efficiency
and equity.
Market Failure
 Failure of Competitive Markets
 Market Power
 Incomplete Information
 Externalities
 Goods are differentiated
 Public Goods
 Why do health care markets fail? ~ Why is health
care different from traditional competitive markets
 Limited number of hospitals and providers; regulated
market
 Heterogeneous commodities
 Ill-informed buyers
 Ill-informed providers

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Market Failure
 Market Power
 The abuse of MARKET POWER, which can occur whenever a single buyer or
seller can exert significant influence over PRICES or OUTPUT
 Either monopolistic (or oligopolistic) or monopsonistic (Oligopsonistic)
power
 Effect is for production at lower level than society truly desires
 Price is set above (or in the case of monopsony, below) marginal cost

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Market Failure
 Incomplete (Imperfect) Information
 Asymmetric information is not the same
thing, though many textbooks use them
interchangeably
 usually implies that one party holds perfect or
near perfect information and the other does
not
 Producers may have an incentive to supply too
much or too little (clinics, doctors?)
 Consumers may buy products with little
benefit and not buy some with great benefit
(e.g., toys vs. childhood vaccinations)

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Imperfect Information, continued
 Imperfect information is probably the least described (to the
public) and most important reason for the failure of health
care markets
 Even the providers of health care have little understanding of the value
of what they provide
 How can the consumer be expected to know better when the physician,
etc. does not know?!
 Why would I not get a Cardiac Echo exam if I have palpitations?
 What do I tell my mother when she asks whether she should take Zantac for
dyspepsia?
 How long should my brother be in therapy?
 Physicians tend to believe “science.”
 Medicine, as practiced, is very new.
 ASA; Thalidomide; Obesity; Anti-arrhythmics; Cholesterol?

By: Gizachew T. 34
EXTERNALITIES AND MARKET INEFFICIENCY
 An externality refers to the uncompensated impact of one person’s

actions on the well-being of a bystander.
 Externalities cause markets to be inefficient, and thus fail to maximize
total surplus.
 An externality arises...
. . . when a person engages in an activity that influences the well-being of a
bystander and yet neither pays nor receives any compensation for that effect.

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 When the impact on the bystander is adverse, the externality is called a
negative externality.
 Automobile/ factory exhaust
 Improper use of pesticides
 Cigarette smoking
 Loud stereos in an apartment building

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 When the impact on the bystander is beneficial, the externality is called a
positive externality.
 Vaccinations and herd immunity
 Restored historic buildings
 Research into new technologies

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 Negative externalities lead markets to produce a
larger quantity than is socially desirable.
 Positive externalities lead markets to produce a
lesser quantity than is socially desirable.

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Goods are differentiated
 Branding
 Designer labels -
they cost three
times as much but
are they three times
the quality?
 Technology – lack
of understanding of
the impact
 Dr. X charges more
than Dr. Y to see
patients Which one is the ‘quality’ item and why?

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Public Good
 Public Goods: Markets would not provide such goods and
services at all!
 Non-rival in consumption, exclusion is costly
 Private markets under-supply
 Medical research, in general
 A good that can be made available cheaply to many consumers, but
once the good is provided to some consumers, it is very difficult to
prevent others from consuming it
 Why should we perform research in our department that will improve
health care but MAY decrease profits/income?
 Why should I spend 500 hours in the operating room perfecting a
procedure that will replace one that takes 2 hours to do?

By: Gizachew T. 40
(C) How the Economy as a Whole Works
 (8) The standard of living depends on a country’s
production.
 In 1997 the average American had an income of about
$29,000. In the same year, the average Mexican earned
$8,000, and the average Nigerian earned $900.
 What explains these large differences in living standards
among countries and over time?
 The answer is surprisingly simple. Almost all variation in
living standards is attributable to differences in countries’
productivity
 Productivity is, the amount of goods and services produced from
each hour of a worker’s time.
 In nations where workers can produce a large quantity of goods
and services per unit of time, most people enjoy a high standard of
living;
 (9) Prices rise when the government prints too much money.
 In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than two
years later, in November 1922, the same newspaper cost 70,000,000 marks.
 Inflation is an increase in the overall level of prices in the economy
 What causes inflation?
 When a government creates large quantities of the nation’s money, the value of the
money falls. In Germany in the early 1920s, when prices were on average tripling every
month, the quantity of money was also tripling every month.

• (10) Society faces a short-run tradeoff between inflation and unemployment.

 If inflation is so easy to explain, why do policymakers sometimes have trouble
ridding the economy of it?
 One reason is that reducing inflation is often thought to cause a temporary rise in
unemployment
 Phillips curve a curve that shows the short-run tradeoff between inflation
and unemployment

 Is the health care market considered as market economy?

Deviations from Competitive Assumptions in
Healthcare
 #Barriers to entry: Licensure, accreditation
 +Informational asymmetry
 +Monopoly power
 +Non-uniformity of otherwise commodity products
 +Externalities
 *Non-profit oriented motivations
 +Considerable uncertainty
 How will I treat myself, my mother, my brother, my children,
society, people I hate?
 *Healthcare as Right? Government insinuation in financing
Note: Some are market failures+; Some are redistribution issues*; Some are
regulations created to deal with “market failure”#
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Demand and supply and equilibrium
 Supply and demand are the two words that economists use most often
 Supply and demand are the forces that make market economies work.
 They determine the quantity of each good produced and the price at which it
is sold.

MODEL OF DEMAND
 The model of demand is an attempt to explain the
amount demanded of any good or service.
DEMAND DEFINED
• The amount of a good or service a consumer
wants to buy, and is able to buy per unit time.

THE “STANDARD” MODEL OF DEMAND
 The DEPENDENT variable is the amount demanded.

 The INDEPENDENT variables are:
 the good’s own price
 the consumer’s money income
 the prices of other goods
 preferences (tastes) and expectations

Demand, markets and competition
 The terms supply and demand refer to the behavior of

people as they interact with one another in markets.
 A market is a group of buyers and sellers of a particular
good or service.
 The buyers as a group determine the demand for the
product,
 The sellers as a group determine the supply of the
product. Before discussing how buyers and sellers
behave,

…demand…
 WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS?
 Price
 Income
 Prices of Related Goods
 Substitutes
 Complements.
 Tastes
 Expectations

THE DEMAND SCHEDULE AND THE DEMAND CURVE
 Whenever any determinant of demand changes, other than the good’s

price, the demand curve shifts.
 Any change that increases the quantity demanded at every price shifts the
demand curve to the right.
 Similarly, any change that reduces the quantity demanded at every price
shifts the demand curve to the left.

VARIABLES THAT AFFECT QUANTITY A CHANGEIN THIS VARIABLE . . .
DEMANDED
Price Represents a movement along the demand curve
Income Shifts the demand curve
Prices of related goods Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of buyers Shifts the demand curve

THE LAW OF DEMAND
 The Law of Demand says that a decrease in a good’s own price will result
in an increase in the amount demanded, holding constant all the other
determinants of demand.
 The Law of Demand states that demand curves are negatively sloped.

A DEMAND CURVE
 A demand curve must look like this, i.e., be
negatively sloped.
own
price
demand
quantity demanded
Market for tacos
The demand curve means:
You pick a price, such a p0, and the demand curve shows
how much is demanded.
own
price
p0
demand
Q0 quantity demanded
Market for tacos

Go to hidden slide

At a lower price, consumers want to buy more.
own
price
p0
plower
demand
Q0 Q1 quantity demanded
Market for tacos

Other factors affecting demand
 The question here is how to show the effects of changes in income, other
goods’ prices, and tastes on demand.

 Suppose people want to buy more of a good when
incomes rise, holding constant all other factors
affecting demand, including the good’s own price.
own price
How does this affect the
demand curve?
$1/can
demand @ I = $1000
quantity of goods
Market for goods
Introduction to Pharmacoeconomics,
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hidden slide
This is a change in demand. It shows up as a shift to the right of
the original demand curve.
own price
$1/can
demand @ I = $2000
demand @ I = $1000
quantity
Market for goods

An increase in income increases demand when pizza is normal.
own price
demand @ I = $2000
demand @ I = $1000
quantity
Market for pizza

Suppose instead that pizza was
an inferior good.
own price What’s the effect on the demand

curve for pizza if income rises
to $2,000?
demand @ I = $1000
quantity
Market for pizza

Go to hidden slide
Supply
 The quantity supplied of any good or service is the amount that sellers
are willing and able to sell.
 WHAT DETERMINES THE QUANTITY AN INDIVIDUAL SUPPLIES?
 Price
 Input Prices
 Technology
 Expectations

MODEL OF SUPPLY
The model of supply is an attempt to explain the
amount supplied of any good or service.
SUPPLY DEFINED
The amount of a good or service a firm wants to
sell, and is able to sell per unit time.

THE “STANDARD” MODEL OF
SUPPLY
The DEPENDENT variable is the amount
supplied.
The INDEPENDENT variables are:
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies

VARIABLES THAT AFFECT A CHANGEIN THIS
QUANTITY SUPPLIED VARIABLE . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve

THE SUPPLY CURVE
The supply curve for any good shows the

quantity supplied at each price, holding
constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.

The INDEPENDENT variable is the good’s own
price.

THE LAW OF SUPPLY
The Law of Supply says that an increase in a

good’s own price will result in an increase in
the amount supplied, holding constant all the
other determinants of supply.
The Law of Supply says that supply curves are

positively sloped.

A SUPPLY CURVE
A supply curve must look like this, i.e., be positively
sloped.
own supply
price
quantity supplied
TACO MARKET
The supply curve means:
You pick a price, such a p0, and the supply curve shows
how much is supplied.
own
supply
price
p0
quantity supplied
Q0
TACO MARKET
Jimma University
Other factors affecting supply
The question here is how to show the effects of
changes in input prices, technology, and taxes.
The answer, of course, is that changes in input

prices, technology, or taxes cause the supply
curve to shift.

Changes in input prices
 Consider the supply of beer, and suppose the price of hops, a crucial
input to beer, falls. Beer firms now find that beer production is more
profitable than it was before, and they respond to this be increasing
the supply of beer.

This is a change in supply. Beer firms
want to sell more beer at each price of beer.
own price supply @ hops price

of $300/ton
supply @ hops
price of $100/ton
quantity
BEER MARKET
Demand and supply
 Having analyzed supply and demand separately, we
now combine them to see how they determine the
quantity of a good sold in a market and its price.
 The dictionary defines the word equilibrium as a
situation in which various forces are in balance—and
this also describes a market’s equilibrium.
 At the equilibrium price, the quantity of the good that
buyers are willing and able to buy exactly balances the
quantity that sellers are willing and able to sell.
 The equilibrium price is sometimes called the market-
clearing price because, at this price, everyone in the
market has been satisfied:
Efficiency and ‘the market’
Price/
Cost
Supply
Demand
Quantity
Efficiency and ‘the market’
Price/
Cost
Supply
A
Equilibrium
Price PA
Demand
QA Quantity
PRICE DETERMINATION IN
MARKETS
 The market demand curve shows the amount
demanded at every price.
 The market supply curve shows the amount
supplied at every price.
 The question now is whether there is some
price at which the quantities supplied and
demanded are the same.

EQUILIBRIUM PRICE DEFINED
 The equilibrium price of a good is:
 a price at which quantity supplied equals quantity demanded.
 a price at which excess demand equals zero.
At the equilibrium price there is no net

tendency for price to change.

 Excess demand exists when, at the current price, the quantity demanded is
greater than quantity supplied.
 Excess supply exists when, at the current price, the quantity supplied is
greater than the quantity demanded.

Excess supply = Qs - QD
price
EXCESS SUPPLY
supply
p = $3
demand
QD QS
Market for tacos quantity

Excess demand = QD - QS
price
supply
EXCESS DEMAND
p = $1
demand
QS QD quantity
Market for tacos

 When there is EXCESS DEMAND for a good, price will tend to rise.
 When there is EXCESS SUPPLY of a good, price will tend to fall.

 When excess demand equals zero, price must be the equilibrium price,
and we say the market is in equilibrium.
If you want to find out the price at which a market

is in equilibrium, then look for the price where the
excess demand is zero.

 Economists are interested in the explaining equilibrium prices.
 In particular, they are anxious to explain why equilibrium prices change.

 What is the equilibrium price in the market for burger ? Show it
on the diagram. What is the equilibrium quantity of burger ?
P supply
$4
$3
p = $2
$1 demand
Q
Burger MARKET
Go to hiddenJimma
slideUniversity
 The market for burger is in equilibrium at a price of $2 per burger.
P supply
p = $2
demand
Q
QE
Burger MARKET

How can the price of burger change?
 Only if there is a change in supply, or if there is a change in demand.
 But remember, we already know the list of reasons why supply and
demand can change.

 Changes in demand can be caused by:
 Changes in supply can be caused by:
Introduction to Pharmacoeconomics, Jimma

Go to hidden University
slide
 Changes in demand can be caused by
changes in consumer incomes
changes in the prices of substitutes
changes in the prices of complements
changes in tastes
Changes in supply can be caused by

changes in prices of inputs
changes in technology
changes in taxes

 The following is a series of sample problems showing changes in the
equilibrium prices of some goods.

Classes at Jimma Community College are an
inferior good. People’s incomes fall, perhaps
due to a recession. What is the effect on JCC
tuition and enrollment?
P
supply
p0
demand @ high income
q0 Q
LCC ENROLLMENT
Go to hidden slideUniversity
Because classes at JCC are inferior, a decrease in income causes demand to
increase. This creates an excess demand and price tends to rise.
P supply The new equilibrium will

have higher tuition and
enrollment
Excess demand
p1
p0
demand @ low income
demand @ high income
Q
q0 q1
LCC ENROLLMENT
THE MARKET FOR APARTMENTS IN JIMMA TOWN IS IN
EQUILIBRIUM, AND JCC RAISES THE PRICE OF DORM
ROOMS. WHAT IS THE EFFECT ON THE MARKET FOR
APARTMENTS IN JIMMS TOWN?
P supply
p0
demand
Q
q0
E.L. APARTMENTS
Go to hiddenJimma
slideUniversity
The price of JCC dorm rooms increases.
Here are the steps in the move to a new equilibrium.
supply
P The excess demand for
housing
Excesscauses
demandprices to rise.
p1
p0 D @ new (higher) JCC price
D @ old JCC price
q0 q1 Q
J.T APARTMENTS
Let’s say potato chips and beer are complements. The price of
beer rises. What is the effect on the market for chips?
P supply
p0
demand @ old beer price
Q
q0
NACHO MARKET
chips and beer are complements. The price of beer
rises. As a result the demand for chips falls.
Here's the process:
P supply
Excess supply
So price and quantity are both
lower.
p0
demand @ old beer price
p1
demand @ higher beer price
q1 q0
Q
Chips
People come to believe that eating apples is good for them. The more apples they
eat, the more likely they are to stay well. What is the effect on the market for
apples?
P supply
p0
demand
Q
q0
APPLE MARKET

slide
There is a change in preferences that affects demand. Here's the process.
Demand
P supply increases, so
price and
quantity are
p1 higher.
p0 new demand
demand
q0 q1
Q
APPLE MARKETJimma University
Classes at universities are produced using faculty labor services, and other inputs
like buildings and computers. The faculty salaries increase by 10%. What is the
effect on tuition and enrollment at universities?
p
(tuition)
supply at original wage
p0
demand
Q
q0
Enrollment

Universities want to sell fewer enrollment places
at the higher level of faculty salaries. This
changes supply. Here's the process.
supply at higher faculty wages

P supply at original wage
Supply decreases,
creating excess
demand.
p1 Price (tuition) is
higher, and
p0 enrollment
demand drops.
q1 q0 Q
enrollment
JUCAVM agricultural scientists develop a new strain of
corn that increases yields by about 15%. What is the
effect of the improvement in technology on the
market for corn?
P supply
p0
demand
q0 Q
CORN MARKET

slide
The improvement changes supply, creating an
excess supply of corn. Here's the process.
In the new equilibrium price is
lower and quantity higher.
Excess
P supply supply
supply with improved

technology
p0
p1 demand
q0 q1 Q
CORN MARKET
THE MARKET FOR MEDICAL CARE IS IN EQUILIBRIUM,
AND CONSUMERS’ INCOMES INCREASE. WHAT IS THE
EFFECT ON MARKET PRICE?
P
supply
p0
D at lower income
Q0 Q
MEDICAL CARE MARKET

If medical care is normal, the increase in incomes
causes an increased demand for medical care at
the price p0. Here's how the process works.
Excess demand.
P supply
The new equilibrium has
higher price and higher
p1 quantity.
p0 D at higher income
D at lower income
Q0 Q1 Q
MEDICAL CARE MARKET
SUPPLY/DEMAND SUMMARY
 Market price serves as the adjustment mechanism to move markets
to equilibrium.
 Price changes in response to the existence of excess demand or
excess supply.
 Changes in demand and changes in supply lead to changes in
equilibrium prices and quantities.

What are Markets?
A market is where buyers and sellers:
 meet to exchange goods and services
 usually in exchange for money
The market may be in one specific place

or
not exist physically at all

An Invisible Market?
Markets can exist:
 over telephone lines
 online
 in emails
As long as what happens involves buyers and sellers in a business
transaction

Consumer Markets
You should be familiar with these:
 consumers interact with sellers
to buy goods and services
 sellers can be retailers using high street shops or out-of-town stores
 sellers can use other sales media

New Ideas for Selling to
Consumers
Alternatives to conventional retailing:
 Mail order (including catalogue shopping)
 Online, Web-based selling
(‘e-tailing’)
 Direct producer-to-consumer selling

Industrial Markets
The business world’s equivalent
of consumer markets:
 business organisations sell to other businesses
 not to a final consumer
 these other businesses use what they’ve bought to make new products

What Are Markets?
 Markets are classified by 4 structures
1. Pure (perfect) Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
By: Gizachew T. 111
Market Structure
 Determinants of market structure
 Freedom of entry and exit
 Nature of the product – homogenous (identical), differentiated?
 Control over supply/output
 Control over price
 Barriers to entry (by laws or cost of entry)

THANK YOU VERY MUCH


Chapter-1 Introduction To Economics

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Gizachew Tilahun (Assitant Professor)

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 Choosing between which

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 Utility is the amount of satisfaction to be obtained from a good or service at a

 Intrinsic worth or price of a good or service.

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 (1) People face tradeoffs.

Introduction to Pharmacoeconomics, Jimma University

 (1) People face tradeoffs.

Introduction to Pharmacoeconomics, Jimma University

Making decisions requires trading

Introduction to Pharmacoeconomics, Jimma University

 (2) The cost of something is what you give up to get it.

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 (3) Rational people think at the margin.

Introduction to Pharmacoeconomics, Jimma University

• (4) People respond to incentives.

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 (B) How People Interact

Introduction to Pharmacoeconomics, Jimma University

 (6) Markets are usually a good way to organize economic activity.

Introduction to Pharmacoeconomics, Jimma University

 Market economy is an economy that allocates resources through the

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 An externality refers to the uncompensated impact of one person’s

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

• (10) Society faces a short-run tradeoff between inflation and unemployment.

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 The DEPENDENT variable is the amount demanded.

Introduction to Pharmacoeconomics, Jimma University

 The terms supply and demand refer to the behavior of

Introduction to Pharmacoeconomics, Jimma University

Introduction to Pharmacoeconomics, Jimma University

 Whenever any determinant of demand changes, other than the good’s