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Chapter 1
Chapter 1
Yet! Nowhere in the world is there a health care system that devotes enough
resources to health care to meet all of its citizens’ wants.
Production, Resources, Scarcity and
Opportunity Cost
• In a national health system, it is likely that the aim is to meet needs
rather than wants.
• Human nature: meeting one need may mean that another need is not
met and that no-one has discovered a limit to need.
To summarise:
• In the economy as a whole, there are not enough resources to meet all
of the wants that people have, so we have to choose which wants are
met and which are not met;
• In the healthcare system there are not enough health care resources
to meet all of the health needs that people have, so we have to choose
which needs are met and which are not met.
Production, Resources, Scarcity and
Opportunity Cost
• An assertion of economics is that scarcity, and the resulting
necessity to choose between different uses for productive
resources, applies everywhere in an economy and cannot be
avoided.
This is the premise underlying a key economics concept called
opportunity cost.
Producing any economic good or service means that the
scarce resources that are used to create it cannot be used to
produce other goods or services.
Production, Resources, Scarcity and
Opportunity Cost
Opportunity cost is the loss of the opportunity to create benefits
by using resources in a different way.
There are many possible goods and services that different
combinations of resources could produce, the opportunity
cost of using resources in a particular way is defined as the
benefits that would have resulted from their best alternative
use.
Costs in economics usually means opportunity costs.
This is quite different from financial costs, which is the cost of
goods, services and scarce resources in terms of the money
that must be paid to obtain them.
Markets, Demand and Supply
• Economics is a social science that refers to how society
decides.
• The society makes collective decisions about what,
how and for whom to produce.
• In most modern economies, this is done through
markets by the interaction of those who wish to buy
(buyers, or consumers) and those who wish to sell
(sellers, or suppliers).
Markets bring together the demand for goods from
consumers and the supply of those goods from
suppliers.
Markets, Demand and Supply-
Markets
• Economics analyses markets mainly through
what is called price theory.
• Consumers and suppliers base their buying and
selling decisions on the price that they must pay
or will receive.
Therefore, price acts as a signal to both groups
as to what they should do in the market.
Markets, Demand and Supply-
Markets
Consumers will want to buy more when the price is
lower,
Suppliers will want to sell more when the price is
higher.
If prices are too high, then suppliers will not be able to
sell all that they want to, and may lower the price.
If prices are too low, there will be consumers who
cannot buy all that they want. As a result, consumers
may bid more, or suppliers may see the possibility that
they can raise their price but still be able to sell all that
they want.
Markets, Demand and Supply-
Markets
• The presence of excess demand or excess
supply determine how much of a good or
service is sold and the price that it is sold for.
Excess demand: a situation in which the quantity
of a good demanded is greater than the quantity
supplied at the current price.
Excess supply: A situation in which the quantity of
a good supplied is greater than the quantity
demanded at the current price.
Markets, Demand and Supply-
Markets
The price that equates supply and demand is equilibrium price (P*).
At P*,quantity demanded=quantity supplied=Q*. Market is in
equilibrium.
Markets, Demand and Supply-
Markets
• At a price higher than P*, more sellers would wish to sell, but not
all of them would find buyers. There would be excess supply.
• At a price less than P*, there would be more buyers than sellers
(excess demand). So, sellers could raise their prices.
Markets, Demand and Supply-
Markets
Markets, Demand and Supply-
Markets
Markets, Demand and Supply-
Markets
• This is a simple model of a market for a single good that shows
one way in which society decides for whom to produce.
Consumers can obtain goods if they are both willing and able
to pay for them.
The more willing and the more able that they are, the more
that they can potentially consume.
To conclude:
• the demand for health care can be analysed as if it
were any good or service, but it has peculiarities that
may mean that the usual assumptions about the
resource allocation effects of markets do not hold.
Note:
Economies of scale is a cost advantage of
a firm when it increases its output level.
This advantage is due to the inverse
relationship between per-unit fixed cost
and the quantity produced. The greater
the output produced, the lower the per-
unit fixed cost.
Markets, Demand and Supply-
Supply
Marginal cost could be large, though the change in the amount of the
good or service is small.
Suppose that the service is a particular surgical operation, and the surgical
unit performing it has reached full capacity. Performing one extra
operation would require a new theatre to be built, so its marginal cost
would be very high.
However, the marginal cost of the last operation performed within the
existing capacity may have been quite small.
So;
Marginal cost may vary considerably with respect to the same size of change in the
other variable, in this case one operation, depending on the absolute level of that
other variable, in this case the number of operations already being performed.
Markets, Demand and Supply-
Incremental Analysis and the Margin
At the beginning of an inpatient stay there are high costs of surgery and perhaps
of high dependency care.
At the end of the stay there may simply be basic nursing care and ‘hotel’ costs,
which will be much smaller than the costs averaged over the whole length of stay.
Reducing the number of low dependency days at the end of the stay will therefore
save far fewer costs than might be expected by looking at the average.
Marginal benefit: the extra benefit gained by the consumption of one more
unit of a good. Again, it is not a small or unimportant benefit.
Another way to view this is that, given the costs of employing staff,
an efficient clinic cannot undertake more treatments without them
costing more to provide. As before, it is Pareto efficient: production is
economically efficient for a given set of input prices if it is only
possible to produce more by incurring greater costs.
Markets, Demand and Supply-
Efficiency and Equity
Social efficiency is a much broader concept. Both
technical efficiency and economic efficiency concern
production, and if the supply side of the market achieves
economic efficiency in every market, there is allocative
efficiency in production for the economy as a whole. An
equivalent concept for the demand side of the market is
allocative efficiency in consumption where, given prices
of goods, consumers maximise their utility.