DIPLOMA OF HEALTHCARE

MANAGEMENT

DHM 2133
HEALTH ECONOMICS

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 DHM 2133
Lecture by: LALITA
ANBARASEN

CHAPTER 1:
INTRODUCTION TO
ECONOMICS
Definition of Economics

There are several definitions of Economics, some of the definitions which you can familiarize
yourself with include:

I. Study of how we use scarce resources to produce goods and services to satisfy our wants.

II. Social science concerned with the efficient use of limited or scarce resources to achieve
maximum satisfaction of human material wants.

III. The study of how best to allocate scarce resources among competing ones.
Basic Concepts in Economics

You need to understand certain basic concepts in economics to have a clear understanding of
health economics. The basic concepts include; goods, scarcity, opportunity cost, rational choice,
economic resources, utility, demand and supply.

1. Good is a tangible object that is capable of satisfying human wants. Materials like cars,
clothes, food, cookers can be regarded as goods and health can also be considered an
economic good.
2. Service is an intangible action that is capable of satisfying human want – such services
include water supply, health care, waste disposal, etc. Services satisfy our wants as much as
goods do. Goods such as sphygmomanometers, suction machine are used to provide
services.
3. Scarcity is a condition in which it is impossible to satisfy all human wants for goods and
services and this forms the central concept in economics. Scarcity is said to occur when we
can not have every good or service that we need or when we want something that we can
not have. No one can have everything that he or she wants and we therefore have to select
goods and services we think can give us greatest satisfaction. For example some people who
are economically disadvantaged may have to choose between going for health care and
using the available money to pay school fees or house rent. Scarcity exists at individual,
institutional, community and government levels
3. Opportunity Cost is defined as the value of the second best choice that is given up when a
first choice is made. Every choice one makes is a trade-off between the benefits and costs of
one’s decision. Usually one will want to make a choice that will result in the smallest opportunity
cost and the greatest possible benefit. If this is the case then one has made a rational choice. If a
person chose to use little money available to him to buy prescribed drugs for his child as against
the other choice of buying alcoholic drink, that choice can be considered rational. From this
example one can imagine how well people choose to make rational choice. Rational behaviour
means that different people will make different choices because their preferences,
circumstances, and available information differ. Rational decisions may change as circumstances
change. Try to imagine how our culture makes people spend their money on ceremonies rather
than spending such money to take care of them so that they can live well.

4. Utility is the benefit consumers get from the purchase of goods and services. It helps to
determine how much the consumer is willing to pay. Marginal utility is the additional utility
gained by consuming one more unit.
5. Economic resources are all natural, human, and manufactured resources which go into the
production of goods and services. It is broadly divided into two:

I. Property resources include land (natural resources) or raw materials and capital.

II. Human resources include labour and entrepreneurial ability.

Demand and Supply

Demand

Demand is the quantity of a product that consumers will purchase at each possible price. Under
normal condition there is a relationship between the price of a product or service and the
quantity that will be demanded.

The law of demand states that if everything else remains equal, more of a product will be
purchased at a lower price than at a higher price or less of a product will be purchased at a
higher price than a lower price.

For example a doubling in the cost or price of a contraceptive will result in less demand if all else
are equal and conversely a reduction in the price or cost will result in increase in demand.

If all else are equal implies an assumption that no other event takes place other than the
change in price to affect willingness of clients to patronize the service. You can try and
understand demand in the context of goods purchased for food in our markets.

What happens when many people suddenly get interested in buying a product particularly
during festivities?
Determinants of demand

1. Tastes and preferences – Personal feelings toward the value or desirability of various
products. The desire for a particular type of frame for eye glasses may be determined by the
individual’s taste which may be influenced by what is in vogue.

2. Disposable income – The amount of income that people have left after they pay their taxes.
The quantity of products that people buy depends on the disposable income. If you were
given some money as a gift you are likely to make demand for certain items which you
probably may not demand for if you were not given this gift. There is a direct relationship
between disposable income and demand under normal circumstances. However, sometimes
demand for low quality or inferior goods are inversely related to income. Demand for low
quality or fake drugs and even low quality health care is usually higher among those with low
income.
3. Price of related goods – When the price of a good changes it often have effect on the demand
for a related product (substitute good) which can be used in place of the other. If you find that
you can not afford to buy tin milk as a result of price increase you may choose to buy powdered
milk. Increase in price of certain drugs may result in higher demand for alternatives to the drugs.

4. Number of consumers – Increase in the number of people who purchase a product or utilize a
service will bring about a change in demand. In epidemics, the large number of people affected
brings about an increase in demand of some drugs or vaccines required to manage or control
the epidemics.

5. Expectation of the future – Demand for a product can change based on their expectation for
the future
Supply

Supply is defined as the quantity of a good or service that firms will offer for sale at each
possible price. The Law of supply states that if not else changes, more of a product will be
offered for sale at a higher price than at a lower price or conversely less of a product will be
offered for sale at a lower price than at a higher price If the price of a product increases the
quantity supplied will increase. The basic determinants of supply are:

1. Resource prices – the price used in the production of the good or service. This determines
the price of the goods. If the price of production becomes higher it may reduce the supply of
such goods.

2. Technique of production – With improvement in technology some goods become cheaper to

produce and thus improve the supply of such goods.

3. Taxes and subsidies – Increase in sales or service tax will increase cost of good or service and
where subsidies increase then the cost reduces. Government subsidy on drugs can increase
supply of drugs.
4. Prices of other goods – In manufacturing firms, increase in price of a particular product may
make the firm shift to production of similar product of lesser price and through this increase
supply

5. Price expectations – Expectation of the future price of a product can affect the producers
current willingness to supply that product

6. Number of sellers in the market – Other things being equal the more the number of people or
firms involved in the supply of a product or service the more the market supply. Increase in the
number of firms producing anti-retroviral drugs (ARV) result in increase in the supply of the drug
in the market.

7. Demand and supply – For an equilibrium price, the quantity offered and the quantity
demanded are the same. As supply goes up and demand goes down, the price is likely to go
down.
Thank you