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 Course Description
• Module title:

INTRODUCTION
– Introduction to Pharmaco-economics

• Credit value of the module:

– 3 cr. hours

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 METHODS OF TEACHING

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• Illustrated and interactive lecture using imaginative slides.
• Collaborative learning through brainstorming, question and

INTRODUCTION
answer, and group discussion.
• Individual and/or group assignment
• Classroom presentation and discussion

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Methods of teaching
 Lectures

INTRODUCTION
 Exercises/
 Assignments

Email for communication:

tefera_tezera@yahoo.com
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 OBJECTIVES OF THE COURSE

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After completion of this course, students will be able to:

INTRODUCTION
Describe the different methods of pharmaco-economic analysis.
 Evaluate pharmaco-economic studies
 Apply pharmaco-economic findings for decision making.

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OBJECTIVES OF THE UNIT

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 Economics??

INTRODUCTION
 Health economics??
 Pharmacoeconomics ??

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INTRODUCTION
Section one: Economics

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1. BASICS OF ECONOMICS
 What is Economics?

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 isthe study of allocation of scarce resources among
competing wants so as to “maximize” the satisfaction of

INTRODUCTION
those wants.
 the ‘science of scarcity’.=> Study of choice under
conditions of scarcity.
 The systematic study of resource allocation
mechanism among competing wants so as to maximize
the satisfaction of those wants.
 How people choose to use scarce or limited productive
resources to produce various commodities and how these
commodities should be distributed. 8
BASICS OF ECONOMICS…

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 Economist believe that Behavior of people and institutions

INTRODUCTION
in making choice are predictable and underlying this
predictability is the assumption that people on the whole act
in a way that makes them and their families better off rather
than worse off.

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SCARCITY AND INDIVIDUAL CHOICE
 Economistsstudy choices we make as individuals,
and consequences of those choices

INTRODUCTION
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 Economists also study more subtle and indirect
effects of individual choice on our society.

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SCARCITY AND SOCIAL CHOICE

 The problem for society is a scarcity of resources

 Scarcity of Labor
 Time human beings spend in producing goods and services

INTRODUCTION
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 Scarcity of Capital
 Something produced that is long-lasting, and used to make other
things that we value
 Scarcity of land
 Physical space on which production occurs, and the natural
resources that come with it

 As a society our resources—land, labor, and capital—are

insufficient to produce all the goods and services we might
desire.
 In other words, society faces a scarcity of resources.
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EXAMPLES OF SOME DECISIONS
ECONOMISTS HAVE ANALYZED

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 Whether to buy a car or house.

INTRODUCTION
 Whether to have pizza for dinner tonight, or something
else.
 How hard to study for this course.
 Whether to go to college, and if so, which one.

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INTRODUCTION
Why peoples Study Economics??

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WHY STUDY ECONOMICS
To understand the world better.
You’ll begin to understand the cause of many

INTRODUCTION
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of the things that affect your life
To gain self-confidence
You’ll lose that feeling that mysterious,
inexplicable forces are shaping your life for
you

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WHY STUDY ECONOMICS
 To achieve social change
 You’ll gain tools to understand origins of social problems and
design more effective solutions

INTRODUCTION
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 To help prepare for other careers
 You’lldiscover that a wide range of careers deal with
economic issues on many levels
 To become an economist
 You’ll begin to develop a body of knowledge that could lead
you to become an economist in the future
 To make choice among competing alternatives.

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TYPES OF ECONOMICS

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1. Microeconomics

INTRODUCTION
2. Macroeconomics

3. Positive economics

4. Normative economics

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1. MICROECONOMICS
 Micro
 Micro comes from Greek word mikros, meaning “small”

INTRODUCTION
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 Microeconomics
 Study of behavior of individual households, firms/ producers,
and governments
 Choices they make
 Interaction in specific markets

 Focuses on individual parts of an economy, rather than

the whole

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 INTRODUCTION
MICROECONOMIC AGENTS

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Firms
– Produce and sell goods and services
– Buy inputs (labor, capital & raw materials)

Consumers
– Buy goods and services
– Sell inputs (labor services, loanable funds)

slide
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2. MACROECONOMICS

 Macro

INTRODUCTION
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 Macro comes from Greek word, makros, meaning “large”

 Macroeconomics
 Study of the economy as a whole

 Focuses on big picture and ignores fine details.

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3. POSITIVE ECONOMICS

 Study of how economy works. – current status.

INTRODUCTION
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 Statements about how the economy works are positive
statements, whether they are true or not
 Accuracy of positive statements can be tested by looking
at the facts—and just the facts.
 Positive econ. -- Studies the way the world is.
 How much will a new gasoline tax raise the price of
gasoline?
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4. NORMATIVE ECONOMICS
 Study of what should be
 Used to make value judgments, identify problems, and prescribe

INTRODUCTION
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solutions
 Statements that suggest what we should do about economic facts,
are normative statements
 Based on values

 Normative statements cannot be proved or disproved by the facts

alone.- as it describes in advance.

e.g. What should the price of corn be?

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INTRODUCTION
 Discuss Resources???

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02/06/24 INTRODUCTION
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ECONOMIC TERMS

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 Opportunity cost
 Externality

INTRODUCTION
 Market

 Demand & Supply

 Production Possibility Frontier (PPF)

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OPPORTUNITY COST

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What is opportunity Cost
 The value of the best alternative which is

INTRODUCTION
forgone in order to get or produce more of the
commodity under consideration.
 What is your opportunity cost for attending this
class? What about this course?

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EXTERNALITY

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 Cost or benefit arising from economic transactions that
falls on people who do not participate in the transaction

INTRODUCTION
 Externalities are spillovers from other’s production or
consumption of commodities which affect an individual
in either a negative or positive way, but which are out of
the individual’s control
 ‘externality’ is an uncompensated direct effect of the
production or consumption of a good on persons other
than the producers or consumers

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EXTERNALITY…

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 e.g. if a firm producing pharmaceuticals dumps its waste

INTRODUCTION
in a river or pollutes the air. - cost
 e.g. a pharmaceutical firm undertaking research to
identify a new compound to bring to market may
identify useful avenues of research for other firms.-
benefit

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MARKET

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 An adjustment mechanism for supply and demand

INTRODUCTION
which permits the exchange of goods and services

between consumers and producers.”

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DEMAND & SUPPLY

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Demand
 The quantity of a good that people plan to purchase

INTRODUCTION
at a given price.

 The amount of a good or service a consumer wants

to buy, and is able to buy per unit time.

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THE DEMAND CURVE

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 Thedemand curve for any good shows the
quantity demanded at each price, holding

INTRODUCTION
constant all other determinants of demand.

slide
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THE LAW OF DEMAND

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 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

INTRODUCTION
demand.

 The Law of Demand says that demand curves are

negatively sloped.

slide
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A DEMAND CURVE

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 A demand curve must look like this, i.e., be negatively
sloped.

INTRODUCTION
own
price

demand

quantity demanded
Market for products slide
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THE DEMAND CURVE MEANS:

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You pick a price, such a p0, and the demand curve
shows how much is demanded.

INTRODUCTION
own
price
p0

demand

Q0 quantity demanded
Market for product

slide
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WHAT IF THE PRICE OF PRODUCT WERE
LESS THAN P0?

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HOW DO YOU SHOW THE EFFECT ON

slide 35
INTRODUCTION
DEMAND?

Go tohidden slide
Slide 38
OTHER FACTORS AFFECTING DEMAND

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 Price

INTRODUCTION
 The question here is how to show the effects of changes in
income, other goods’ prices (alternatives), and tastes on
demand.

slide
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  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.

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INTRODUCTION
own price
How
Howdoes
doesthis
thisaffect
affectthe
the
demand
demandcurve?
curve?
$1/can

demand @ I = $1000
quantity of beer
Market for beer
slide
38

Go to hidden slideWhen income increase

SUBSTITUTES DEFINED

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 Substitutes: Two goods are substitutes if an increase in
the price of one of them causes an increase in the
demand for the other.

INTRODUCTION
 Thus, an increase in the price of pizza would increase the
demand for spaghetti if the goods were substitutes.

slide
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THE GRAPH SHOWS THE DEMAND CURVE
FOR SPAGHETTI WHEN PIZZAS COST $10
EACH.

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own price
What’s
What’sthe
theeffect
effect of
of an
anincrease
increasein
in

INTRODUCTION
the
theprice
priceofof pizza
pizzato to$15?
$15?

demand @ pizza price of $10

quantity
Market for spaghetti
slide
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Go to hidden slideSubstitutes
COMPLEMENTS DEFINED

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 Complements: Two goods are complements if an increase in
the price of one of them causes a decrease in the demand
for the other.– things used together

INTRODUCTION
 Thus, an increase in the price of pizza would decrease the
demand for beer if the goods were complements.

slide
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 THE GRAPH SHOWS THE DEMAND
CURVE FOR BEER WHEN PIZZAS COST
$10 EACH.

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price What
Whatisisthe
theeffect
effecton
onthe
the
of beer market
marketforforbeer
beerof
ofan
an

INTRODUCTION
increase
increaseininthe
theprice
priceof
of
pizza
pizzatoto$15?
$15?

demand @ pizza price of

$10

quantity
Market for beer
slide
44

Go to hidden slidecomplements
 THE GRAPH SHOWS THE DEMAND
CURVE FOR UMBRELLAS ON SUNNY
DAYS.

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What’s
What’sthe
theeffect
effecton
ondemand
demandof
of
price of ititbeing
beingaarainy
rainyday?

INTRODUCTION
day?
umbrellas

demand on sunny days

quantity
Market for umbrellas slide
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Go to hidden slidetaste
SUPPLY

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 The amount of a good or service a firm wants to sell, and
is able to sell per unit time.

INTRODUCTION
 The quantity of good or service that sellers are willing
and able to sell at a given price.

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 THE “STANDARD” MODEL OF SUPPLY
The DEPENDENT variable is the amount

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supplied.
The INDEPENDENT variables are:

INTRODUCTION
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies.

• The supply curve for any good shows the quantity

supplied at each price, holding constant all other
determinants of supply.
• The Law of Supply says that supply curves are slide
positively sloped. 49
 A SUPPLY CURVE

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A supply curve must look like this, i.e., be positively sloped.

INTRODUCTION
own supply
price

quantity supplied
slide
50
 The supply curve means:

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You pick a price, such a p0, and the supply curve shows how much is
supplied.

INTRODUCTION
own
price supply

p0

quantity supplied
Q0
slide
51
IF THE PRICE OF RISES, HOW IS
THE SUPPLY CURVE AFFECTED?

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own supply

INTRODUCTION
price

p0

quantity supplied
Q0

slide
52
Go to hidden slideSlide 55
 Other factors affecting supply

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The question here is how to show the effects of

INTRODUCTION
changes in input prices, technology, and taxes.

The answer, of course, is that changes in input

prices( raw materials), technology, or taxes
cause the supply curve to shift.=> coz market
slide
54
price is the same or decrease a little.
CHANGES IN INPUT PRICES

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 Consider the supply of beer, and suppose the price of barley, a
crucial input to beer, falls.

INTRODUCTION
 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.

slide
55
 The price of barley falls
from $300 per ton to $100
per ton.

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own price supply @ hops price of

INTRODUCTION
$300/ton

How
Howwill
willthis
thisaffect
affectthe
the
supply
supplycurve
curvefor
forbeer?
beer?

quantity

BEER MARKET slide

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Go to hidden slideSlide 59
CHANGE IN TECHNOLOGY AND TAXES

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 An improvement in technology makes it possible to
produce a level of output with fewer inputs than before.

INTRODUCTION
 Because this lowers the cost of production, profits rise,
and firms will try to supply more.
 An improvement in technology and a reduced tax will
increase quantity supplied.

slide
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SUPPLY-DEMAND EQUILIBRIUM
 The point at which the supply & demand curves

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intersect is called the market’s equilibrium.
 The price at this intersection is called the equilibrium

INTRODUCTION
price, & the quantity is called the equilibrium quantity.
 At the equilibrium price, the quantity of the good that
buyers are willing & 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 (Buyers
and sellers) in the market has been satisfied:

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 SUPPLY-DEMAND EQUILIBRIUM …
 Market Equilibrium; a situation in which the market price
has reached the level at which quantity supplied equals

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quantity demanded.

INTRODUCTION
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UTILITY

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 Utility: The happiness or satisfaction an individual gains
from consuming a good.

INTRODUCTION
 The more utility an individual derives from the
consumption of a good, all else being equal, the more
they would be willing to spend their income on it.

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UTILITY…
 Total utility; the total satisfaction a consumer gets from

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the consumption of all the units of a good consumed
within a given time period.

INTRODUCTION
 Thus if X drank 10 cups of tea a day, her daily total utility
from tea would be the satisfaction derived
from those 10 cups.
 Marginal utility; the extra satisfaction gained from
consuming one extra unit of a good within a given time
period.
 Thus we might refer to the marginal utility that X gains
from her third cup of tea of the day or her fourth cup Vs
satisfaction from tea.
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BASIC QUESTIONS OF ECONOMICS
 As a discipline, it focuses on three general

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questions:
 What to produce? Question of

INTRODUCTION
 What products are produced and in what quantities? Allocation -
 How Deals with
to produce
Economic goals
 By what methods are these products produced of Efficiency &
Effectiveness

 For whom to produce

Question of
 How is society’s output of goods and services divided
Distribution-
among its members?
Deals with
Economic goals63of
equity
BASIC QUESTIONS OF ECONOMICS…

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How are these questions addressed?

INTRODUCTION
 Economic System
Free Market economic system
Command Economy
Mixed Economy

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 BASIC QUESTIONS OF ECONOMICS…
 Free
Market Economy

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An exchange economy without government interventions.
supply and demand are determined by the individual firms
and consumers according to an initial distribution of

INTRODUCTION
resources or raw materials/ inputs.
Price becomes an instrument both of rationing available
goods and signaling relative scarcity.
The price mechanism generates signals which indicate the
measurement of value to consumers and the measurement
of cost to producers.
Self-interest becomes the main driving force of the free
market
 Consumers seeking to maximize utility at a least cost, and
 Producers seeking to maximize profit.
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 BASIC QUESTIONS OF ECONOMICS
 Command economy

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A system where few resource allocation are left to the market
it is the responsibility of a state to assess the wants of

INTRODUCTION
consumers,
Decide what is to be produced and how production is to be
organized.
And finally, the state should supervise the distribution of the
goods to consumers.
supply is dictated by government, which also fixes the price.
Excess demand for a particular commodity is disciplined by
rationing mechanism.
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BASIC QUESTIONS OF ECONOMICS

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 Mixed Economy
 Middle Ground

INTRODUCTION
 A market economy with substantial government involvement.

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PRODUCTION POSSIBILITY FRONTIER
(PPF):
 Sows the maximum possible output combinations of two

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goods or services an economy can achieve when all
resources are fully and efficiently employed.

INTRODUCTION
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PPF ASSUMPTIONS

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 Factors of production fully employed.

INTRODUCTION
 Two goods representative of all other goods and services

in the economy. There are only two goods, e.g.

pizza and spaghetti.

 Technology is fixed. There are limited inputs and given
technology of production.

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AN ECONOMIC MODEL:
THE PRODUCTION POSSIBILITY CURVE

INTRODUCTION
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 Purposes of model
 Show scarcity constraint
 Illustrate economic efficiency
 Introduce opportunity cost concept

 Variables
 Quantities of goods that may be produced
 Givens

 Total amounts of inputs available

 Technology of production slide
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PRODUCTION POSSIBILITY
CURVE

INTRODUCTION
SPAGHETTI

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Which points are attainable
400 and which points are unattainable with
the use of available resources?

300
200
100
0
0 10 20 30 40 50 60
PIZZAslide
71
Go to hidden slidePRODUCTION POSSIBILITY CURVE
PRODUCTION POSSIBILITY
CURVE----RESOURCE VS
SCARCITY

INTRODUCTION
SPAGHETTI

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400 What’s the effect of an improvement
in the technology for producing
spaghetti?
300
200
100
0
0 10 20 30 40 50 60
PIZZAslide
73
Go to hidden slideSlide 76
PRODUCTION POSSIBILITY
CURVE

INTRODUCTION
SPAGHETTI

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400 What’s the effect of an increase in
total resources (inputs)?

300
200
100
0
0 10 20 30 40 50 60
PIZZAslide
75
Go to hidden slideSlide 78
PPF…

INTRODUCTION
 Points “inside” the PPC are inefficient.

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 For any point “inside” there corresponds some point that
represents more production of both goods.

 Note that while points on the PPC are efficient, we cannot

say at this time whether some are better for society than
others.

slide
77
 OPPORTUNITY COST DEFINED

INTRODUCTION
 The
opportunity cost of doing something is what you

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must give up in order to do it.
 The cost of a pizza is what you must give up to consume it,
which in this case is easily computed in money.
 The cost of a college education includes both money and
other foregone alternatives.
 For example, the cost of a year at university includes not
only tuition and books, but the income you could have
earned working on a full time job.

slide
78
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INTRODUCTION
Section two: Health Economics

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2. WHAT IS HEALTH ECONOMICS

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 Economics of Health- Application of the discipline of
economics to the subject matter of health

INTRODUCTION
 Choices are inevitably made in the health sector on
various issues including:- What treatments are provided,
Financing of the health sector, Who receives treatment

 Health economics is the science of assessing cost and

benefits, not to make decisions about resource use, but to
inform those decisions

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WHAT IS HEALTH ECONOMICS

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 What are the kinds of questions Health Economics tries
to answer?

INTRODUCTION
 How do we define and measure health
 How much value do people spent on it
 What are the different channels for producing health
 How do we make overall allocation of resources
 What criteria do we use to guide us

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HEALTH ECONOMICS-CONT
 Major areas for application of economic principles to health

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care
 Costing and pricing of different health interventions

INTRODUCTION
 Reimbursement decision in health insurance
 Other aspects of Health care financing
 Human resource and other health service planning (through better
understanding of labor market dynamics and health care market)

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HEALTH CAPITAL
 Capital refers not just to money in economics sense.
 It refers to anything produced by an economy or people to

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make other things. It includes:
 equipment, machines,

INTRODUCTION
 buildings,
 intermediate goods, like steel beams used later to build
a building,
 knowledge, developed through experience or
education,
 human physical ability developed through exercise

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 02/06/24
INTRODUCTION
 Is health a capital?

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HEALTH CAPITAL-CONT
 Yes-, because it helps a person to produce other

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things. Only a healthy person can be effectively
productive.

INTRODUCTION
Is health care an investment or a consumption good?
 Both, because we enjoy life when we are healthy
which is the consumption side of health.
 On the other hand, health enhances the productivity of
labor and ensures growth in future which means
investment in health care increases capital.

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PPF IN HEALTH CARE
 What is the trade off

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between the two options
(Marginal Rate of

INTRODUCTION
Transformation)?
 Is it possible that the
Marginal rate of
transformation is constant?
 What determines the shape
of the graph?

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PPF IN HEALTH CARE-CONT
 It is very unlikely that the marginal

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rate of transformation would be
constant.

INTRODUCTION
 The surgeons carrying out heart
operations would be working with a
fixed quantity of operating theatres,
heart monitors, and other inputs.
 More surgeons carrying out bypass
operations, the less equipment each
one would have- output per surgeon
would fall.
 This bends the line downwards,
making it concave.
 Law of diminishing marginal rate of
return
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PPF IN HEALTH CARE-CONT
 An allocation of resources is

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efficient if it is impossible to
change that allocation, to

INTRODUCTION
make one person better off
without making someone else
worse off (Vilfredo Pareto)
 Which points are efficient?

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OPPORTUNITY COST
What is the opportunity

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
cost of going from point B
to C?

INTRODUCTION
89
QUESTIONS : PPF GRAPH
Which of the points in the figure are efficient, inefficient and not feasible

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INTRODUCTION
90
TERMINOLOGIES IN HEALTH
ECONOMICS

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 Acquisition cost: The purchase cost of a drug to an agency,
person, or institution.

INTRODUCTION
 Capital cost: The cost to purchase the major capital assets
required by the program, for
example, equipment, buildings, and land.
 Discounting: The most widely accepted method of
incorporating time preference into the
evaluation of a program when the costs and benefits do not
occur at the same point in time.
 Economic competition: The effort of two or more parties
to secure(quantity, price) the business of a third party.
91
TERMINOLOGIES…
 Economic evaluation (economic appraisal): The
comparison of alternative courses of action in

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terms of their costs and consequences, with a view to
making a choice.

INTRODUCTION
 Effectiveness: The extent to which programs achieve their
objectives with any cost.
 Efficiency: Maximizing the benefit to any resource
expenditure, or minimizing the cost of any achieved
benefit.
Equality Vs Equity???
 Equality: Equal shares of some good or service.

 Equity: Fair distribution of resources or benefits among

different individuals or groups. 92
TERMINOLOGIES…

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 Health years equivalent (HYE): The hypothetical
number of years spent in perfect health that are

INTRODUCTION
considered comparable to the actual number of years
spent in a particular state of health.
 HYEs are measured using a two-stage gamble technique
where the health state is described to the respondent,
along with the duration of the state, and the respondent is
asked how many years of life in full health would be
equivalent to this scenario.

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TERMINOLOGIES…

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 Quality-adjusted life years (QALYs): Calculated by
adjusting the estimated number of life years an

INTRODUCTION
individual is expected to gain from an intervention for
the expected quality of life in
those years.

 The quality of life score will range between 0 for death,

to 1 for perfect health, with negative scores being
allowed for states considered worse than death.

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TERMINOLOGIES…

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 Indirect costs: These relate to the losses to society
incurred as a result of participating in the

INTRODUCTION
program, such as the impact on production, domestic
responsibilities, and social and leisure
activities.
 Perspective: The point of view from which an analysis
is carried out. Society, individual, policy maker…

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 3. WHAT IS PE?
PE is

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 Combined analyses of costs and outcomes among two
or more alternative drugs and medical devices or

INTRODUCTION
service delivery models for the purpose of decision-
making
 sub-discipline of the field of health economics that
compares the value of one pharmaceutical to another
 Application of the analytical frameworks, tools, and
methods of the discipline of economics to the
evaluation of pharmaceuticals

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WHAT IS PE?...
• Spending on drug is a major target for saving on health care -

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such focus resulted from:
– Size of drug bill

INTRODUCTION
– Highly visible nature of drug utilization (ease of measurement in
isolation)
– Assumption that saving can be made without detriment to patient
and without having to address sensitive issues such as staff
redundancy
– evidence of wasteful prescribing; and a perception that many drugs
are overpriced and that the profits of the pharmaceutical industry are
excessive.
• Focus on drug cost in isolation is misplaced-rather it should
be on the value of the drug treatment
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WHY IS THE DRUG BILL INCREASING?
 Demographic Factors

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 Absolute population growth
 Relative changes with in a population- aging,

INTRODUCTION
lifestyle…
 Technological advance- alternatives..
 At the beginning of 20th century only few effective
interventions
 Number of effective interventions has steadily increased
 Antibiotics after 1929
 Open heart surgery after 1954

 Hemodialysis after 1960

 Computerized tomography after 1973

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WHY ARE HEALTH SERVICES GETTING
EXPENSIVE?
Disease Pattern

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
 New disease like HIV increase level of ill health
 Epidemiologic transition

INTRODUCTION
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ACTIONS TAKEN SO FAR

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 Government attempts to contain drug bill
 Increased copayments

INTRODUCTION
 Encouragement of formularies
 Subsidization

 The function of health care system is not to

minimize costs but rather to use its available
resources to achieve greater health gain for its
population.
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PE & FORMULARY
MANAGEMENT
 Variousissues need to be considered in formulary

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development

INTRODUCTION
 Traditionally, formulary decisions took into account
only drug acquisition costs, not the potential savings
stemming from use of the better drug--
Pharmacoeconomics is a preferred tool with this
regard as it takes into account all types of outcomes

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RESPONSIBILITIES OF THE CLINICAL
PHARMACIST IN PHARMACOECONOMICS

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 Clinical pharmacists should use PE as a means to

INTRODUCTION
promote efficiency and effectiveness of prescribing, and
aim to move the managers’ debate away from pure cost
to the question of value for money in prescribing.
 Laboratory cost(diagnostic)
 Follow up

e.g. heparin vs enoxaparin use in DVT

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SUMMARY

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 Health economics and pharmacoeconomics are at

INTRODUCTION
their infancy period where they are slowly developing
and testing their methodologies

 Economic evaluations of drug therapy are

increasingly important in decision making
although there are some limitations
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02/06/24 INTRODUCTION
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