Introduction to health economics

Samson Zegeye

SPHMMC for MPH students

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 Learning objectives
• Apply principles and the concept of
economics in the health sector

• Identify the importance of health

economics in the health sector

• Determinants of health economics

• Explain the difference between health and

health care
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 Brain storming

Being in pair (5 minutes)

How do you relate health and Economy ???

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 What is Economics?

• Economics is a science of choice

• Economics is often described as the

‘science of scarcity’ (Witter& Ensor, 1997)

• It studies how people choose to use

scarce resources to produce various
commodities and to distribute them to
various members of the society
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 What is Economics?
• discipline of economics is built upon two immutable
facts:

– that the wants of mankind are unlimited,

– while the resources available to satisfy

them are scarce

• The study of economics is, therefore, concerned

with the ways in which resources are used to satisfy
wants/needs

• As a discipline, it focuses on three general

questions: what to produce; how to produce; and
for whom to produce
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 Economics………
• In managing the economy, governments
must allocate resources between competing
uses and decide which public demands to
satisfy more

• Economic considerations play a key role in all

aspects of life, in agriculture, housing,
industry, trade and health

• It should be noted that health and economic

development are interrelated
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samson Zegeye, SPHMM-College 7
Pessimist: bottle ½ empty

Optimist: bottle ½ full

Economist: bottle ½ wasted

inefficient!
 The ‘Health Economic’ problem
 Unlimited healthcare
“wants” with rapid growth
in health expenditure.

 Insufficient health sector

resources.

 Choosing between ‘wants’

we can ‘afford’ given our
resource ‘budget’.

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 ECONOMICS
• Macro Economics

• Micro Economics

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Macro economics

• Macroeconomics examines national and

international economies
• It studies how the overall level of economic
activity is determined and how government
intervention affects the economy as a whole.

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Microeconomics
• studies the decisions of individual households and
firms, the functioning of individual markets.

􀁠 It deals with the theory of individual choice, that is

decisions made by a particular consuming unit such
as an individual, industries, firms, households etc.

􀁠 E.g. How purchasing decisions of consumers are

influenced by changing prices and income

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 What is health care?
• Important difference between health and
health care
– Health care can be traded on the market but
health cannot.
• Demand health care to improve our health
– Demand for Health Care
• Health care markets differ from markets
for other commodities
– Role for Government

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 What is health economics?
1. Health economics is the study of how
(scarce) resources are allocated to and
within the health economy.
• Production of health care (doctors, specialists,
or nurses).
• How do we distribute health care across the
population?
– Based on who can pay or who needs it or
some combination.
• How much money should the government
spend on health care?

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 What is health economics?
2. Demonstrates the magnitude and
importance of the health sector
e.g. How fast it might be growing and why
3. What makes it different from other markets
and how our analysis may need to adjust
4. Models the determinants of health status
and looks and how government policy
might improve health status in short and
long run

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• Health Economics lies at the interface of
economics and medicine.
• i.e. when we apply the discipline of
economics to the topic of health.

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Why is it important to look at economics in health?

• Health resources are finite.

• A choice must be made about which
resources to use for which activities.
• Economics is concerned with efficiency but it
is more than just efficiency.
• Efficiency is not the only objective in
choosing how health care resources should be
allocated.
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• We also need to think about equity, or the fair
distribution of resources and benefits, which is also
an objective in health care decision-making.

• Economics provides an information framework in

which the objectives of both efficiency and equity
may be pursued.

• Economics also provides a framework which aims at

maximizing benefits within available resources.

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• With only limited resources, it is unable to provide all the
goods and services which ideally we would like.
• There fore we must make a choice between competing use of
limited resources in terms of what to produce, how to produce
it and who shall receive it.
• Economics is concerned with evaluating the choices between
different uses of scarce resources, and there fore the three
basic questions that we are interested.

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• In Health care market the goods are different
services included under curative ,preventive,
promotive and rehabilitative activities.
• E.g.. treatment of patients, Family planning,
immunization services…

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For any market to function
Needs three components:
• Trading of a good or service;
• Two independent players—
- buyers,
- sellers;
• A 'price' of the good or service that conveys
information about its value—
- buyers’ willingness to pay = DEMAND,
- sellers’ willingness to produce = SUPPLY.
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 Economical theories

• Demand
• Price
• Supply

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• Because of scarcity of resources all economic
decisions involve a choice in terms of what to
produce ,how to produce & who shall receive
them.

• Market is one way of addressing these issues

in which resource allocation is determined by
the independent decision of consumers &
producers.
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There are two components of a market
Demand & supply
Qd = f (P, RP, Y, T, ...)
• The quantity demanded (Qd) is sum function of
the price of the good (P); the prices of other
related goods (RP); income (Y); and
preferences and tastes of individuals (T).

• The demand function can represent the

demand of an individual, or of all individuals
demanding a particular good - in which case it
is simply the sum of individual demands.
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Demand
Means;
􀁠 Want it
􀁠 Be able to afford it
􀁠 Have a definite plan to buy it
• demand is defined as the quantity of good that
consumers are willing and able to buy in a
specific period of time.

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 Determinants of demand
There are factors that affect the level of demand
1.Price of good
The law of demand
The law of demand states:
• In general as price of good changes the
quantity of goods demanded changes.
􀁠 Other things remaining the same, the higher
the price of a good, the smaller is the quantity
demanded.
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2.Income
• It is obvious that there must be relation ship
between income & demand but the r/s depend
on the type of good & the level of income of
the consumer.
• Other things remaining the same, If the
quantity demanded of a good increases as
income increases the good is said to be
normal. where as if the quantity demanded
decreases as income increases the good is said
to be inferior.
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3. The price of related goods ( substitutes &
complements )
The demand for different goods is often interrelated.
• All other things being constant if a fall in the price of
one good cause a fall in the quantity demanded of
another goods, then the goods are substitutes.
• Substitutes are goods that can be used in place on
another good.
• All other things being equal if a fall in the price of
one good cause a raise in the quantity demanded of
another good, then the goods are complements.
• Compliment : are goods that can be used in
conjunction with another good.
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4,Preferences
• are individual’s attitudes towards and tastes for
goods and services . . .
• Preferences are shaped by past experience,
genetic factors, advertising information,
religious beliefs, and other socio cultural
factors.
E.g. If a good becomes more fashionable will
cause an increase in demand & vice versa.
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Price elasticity of demand
• is measured by expressing the percentage change in quantity
demanded (Qd) as a proportion of the percentage change in
price (P).

% change in Qd
------------- ------- = Ed (elasticity of demand)
% change in P

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• If the percentage change in Qd is greater than the
percentage change in price the demand for a good is
elastic ( Ed > 1).

• If the percentage change in quantity demanded

changes by less than the percentage change in price
(Ed < 1) the demand is inelastic.

• If the percentage change in price evokes a similar

change in percentage quantity demanded then the
demand is unitary elastic, (Ed = 1).
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 exercises
• The quantity demanded of a certain good in a small
town in the month of November was 5800 kg with
price of 2 birr/kg. But in December the demand falls
to 4500 kg with price change of 6 birr/kg.
• The quantity demanded of another good in the same
town in November was 150 with price of 50 birr each.
But in December the quantity demanded falls to 75
with price change to 70 birr each.
Calculate the price elasticity of demand
Classify it as elastic, inelastic, or unitary

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Supply
• The quantity of a good that producers will
wish to offer for sale at a particular price per
time period.
• There is general positive r/s between the price
of a good & the quantity supplied of that good.

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• The supply function relates the quantity
supplied to the variables likely to affect it.
• Qs = (P, RP, C, RC, T, .......)
• The quantity supplied (Qs) is some function of
the price of the good (P), prices of related
goods(RP), costs of production (C), and
preferences of individuals (p) which will
include socioeconomic and cultural factors.

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The supply curve

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Supply Elasticity
􀁠 PRICE ELASTICITY OF SUPPLY,
• show the rate at which producers are willing to change the
supplied quantity when the price changes.
• The elasticity of supply is roughly measured by expressing the
percentage change in quantity supplied (Qs) as a proportion of
the percentage change in price (P).

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% change in Qs
---------------------- = Es
% change in P
• elasticity between 0 and 1 is considered
relatively inelastic, whereas an elasticity of 1
or higher is considered relatively elastic.

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Equilibrium

• Equilibrium in a market is achieved when

supply equals demand (Figure 4).

• Price and quantity will adjust until the point is

reached where buyers and sellers are content
to exchange a given quantity (q1) at a given
price (p1).

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• If suppliers will be willing to supply more than
buyers are willing to purchase at that price. There will
be excess supply and pressure to reduce prices.
• If buyers will be willing to buy more than suppliers
are willing to offer, there will be pressure on prices to
rise - excess demand.
• other than price change, the supply/demand curve can
shift.
• Assume a change in fashion for a good, leading many
people to want more of it at any price.

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Role of the Government
􀁠 Regulations :
􀁠 Fee controls and rate regulation
􀁠 Quantity and capacity controls;
􀁠 Quality controls;
􀁠 Antitrust regulation to avoid monopolies
􀁠 Subsidies /taxes
􀁠 Public provisions
􀁠 Public information campaigns

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