Wollo University

College of Medicine and Health Sciences

School of public health
Introduction to Health Economics for
GMPH
Credit Hours : 2
Course No: PubH6103

Asnakew Molla (BSc, MPH/Health Economics)

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Learning objectives
At the end of this course, students will be able to:
Explain the meaning and concepts of economics

Identify the major branches of economics

Recognize the effect of economic factors on

health status of society

Define the basic concepts of demand and

consumption
Analyze market failure in the health sector

Define the basic concepts of supply and

production

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Cont…
 Discuss the meaning and basis of cost as a
concept
 Describe the different types of costs
 Discuss health care market
 Explore the different sources of financing the
health service sector
 Differentiate the strong and weak points of
different financing mechanisms
 Explain the viewpoint of an economic evaluation
 Apply cost benefit analysis and cost effectiveness
analysis in assessing the performance of health
care activities
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Course contents

1. Introduction Economics and Health Economics

 Definition of economics and health economics

 Key economic concepts

 Application of Economics to health

 Classification of economics

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Cont…
2. The nature of Demand
The law of Demand

 Factors influencing demand

 Elasticity of demand

 Demand and utility

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Cont…
3. The nature of Supply
 Supply

 Factors affecting supply

Elasticity of supply

Supply and production

Bringing demand and supply together: Market

Equilibrium

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Cont…
4. Market Failures in the Health Sector
The market concept

Externalities

Public goods

Informational asymmetry and the concept of

agency
Supplier‐induced demand (SID)

Monopolies and incomplete markets

Role of government

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Cont…
5. Cost Analysis in Health Care
Types of costs

Calculating costs

Assessing costs

6. Health Care Financing

Principles of public financing

Total expenditure in health sectors

Types of health care financing

Health insurance model

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Cont…

7. Efficiency and equity

 Elements of efficiency
 Economic evaluation of efficiency
 Cost benefit analysis
 Cost effectiveness analysis
 Cost utility analysis
Equity concepts

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 .

Chapter 1
Introduction to Economics and Health
Economics

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Chapter Objectives
 After completing this chapter, students will
be able to:
 Define economics and health economics
 Discuss how economics can be applied to health
 Explain the basic concepts of economics
 Differentiate the different classifications of
economics

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Definition of Economics
 Economics is a social science explains behavior of
the society
 Economics is an academic discipline, which
studies about efficient allocation of scarce
resources so as to attain unlimited human needs.
 Study of scarce resources
 Science of choice
Definition…
 Study how to satisfy the unlimited human needs up
to the maximum possible degree by allocating the
resources efficiently.
 How we choose to use scarce productive
resources that have alternative uses to produce
commodities of various kinds.
 How goods and services we want get produced
and distributed among us
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Definition…
The definition implies:
1. The productive resources are scarce

2. Human wants are infinite, productive resources

can’t satisfy them all

3. That we face a major problem in ‘economizing”

those productive resources so as to satisfy the
largest possible number of our wants

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Primary concern of economics
1. What products are being produced and in what
quantities?

2. By what methods are these products produced?

3. How is society’s output of goods and services

divided among its members?
 Who has access to these measures?

4. How efficient is society’s production and

distribution?
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 Health Economics
 The application of the theories, concepts and
techniques of economics to the health sector.
 The study of how people and organizations make
use of scarce resources and the rewards achieved
in terms of health (quantity and quality of life)

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 Health Economics is concerned with :
 Allocation of resources between various health
promoting activities
 Quantity of resources used in health delivery
 Organization and funding of health institutions
 Efficiency with which resources are allocated and
used for health purposes
 Effects of preventive, promotive, curative and
rehabilitative health services on individuals and
society.

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Cont…

 How is health produced?

 What role does health care play in its
production?
 What is the value of health?
 How do we go about measuring health status?
 What influences demand for health and health
care?

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Cont…
 What influences the supply of health care?
 How can equilibrium between demand and
supply be achieved?
 What is a reasonable price to pay for health?
 How should the health care should be
structured? (Wonderling, 2005)

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 Key Economic Concepts
1. Resources:
 Every item within the economy that can be used to

produce and distribute goods and services

 Labor refers to human resources, manual and non-

manual, skilled and unskilled

 Capital refers to goods that are used to produce other

goods or services, for example machinery, buildings and

tools
 Land refers to all natural resources. It also refers to

manufactured consumables (i.e. almost everything else

that does not fall under labor or capital).
 Entrepreneurship who organizes land, labor and

capital
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Key Economic Concepts …

2. Production:
 Most resources are not, in themselves, useful
to us as individuals but they can be combined
to make something that is useful
 This process is called production.

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Key Economic Concepts …
3. Commodities (or production outputs):
 The results of combining resources in the
production process
 They are either final product, which are then used
to satisfy people’s wants, or else they are
intermediate products, which are used to make
other commodities
 Commodities are either goods that you can hold
or touch (for example a drug) or else they are
services that happen to you (for example a
consultation).
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Key Economic Concepts …
4. Utility
 Utility (for individuals) or welfare (for
populations) are used to describe the
satisfaction or happiness provided by
commodities
5. Scarcity
 Addresses the problem of limited resources
and the need to make choices

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Key Economic Concepts …
6. Opportunity cost
 The potential benefit that could have been
received if the resources had been used in their
next best alternative
 It is the value of the next alternative forgone in
order to achieve something
 The costs of providing one form of health care
should always be balanced against the benefits
which have to be sacrificed

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Key Economic Concepts …
7. Markets
 Any situation where people who demand a good
or service can come into contact with the
suppliers of that good
 Any set of arrangements that allows buyers and
sellers to communicate and thus arrange
exchange of goods, services or resources
 A free market is where such exchange occurs
without interference from the government.

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Key Economic Concepts …
8. Demand
 The maximum quantity that consumer(s) are

willing and able to pay for it at each price

level in a given period
9. Supply
 The maximum quantity that supplier(s) are

willing to produce and sell at each price level

in a given period

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Key Economic Concepts …

10. Market Equilibrium

 The situation when quantity supplied equals
quantity demanded at a particular price.

11. Efficiency
 Efficiency relates to getting the most value
(utility) out of limited resources.

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Key Economic Concepts …

12. Equity
 Equity relates to fair distribution, not same as
equality
 Equity of financial contribution, equity in
access or use of health care, equity in
distribution of health.

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Building blocks of economics
1. Scarcity
Economics as a discipline exists because
resources are scarce and the wants of human
beings are unlimited.
Such that the resources available now or for any

foreseeable time are insufficient to meet all our

wants.
Because resources are scarce, choices are
involved in both production and consumption.

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Discuss in pairs

 What if we lived in a Garden of Eden where

goods and services were abundant and are
provided by the nature of free?

 What would be the role of the economist?

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2. Choice and opportunity cost

 Choice- we cannot have all we want, then

choices must be made.
 Why do we have to make choices at all?
 Our income is finite and given all the goods we
would like to consume, our income is insufficient
to finance them all.
 We must make choices about how best to spend
our limited income.

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Opportunity cost
 Choices involve trade-offs.
 More hospitals means fewer clinics.
 The opportunity cost (also known as the
economic cost) of any good (including service)-
The satisfaction or benefit forgone in not being
able to use the resources involved to obtain
some other good which is also desirable and
provides satisfaction
 The second best alternative we given up to get
something

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Illustration of opportunity cost: options for
expenditure in a year

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3. The margin
 Marginal refers to ‘the next unit’.
 It might be a health service deciding whether to
expand an immunization programme or a doctor
choosing whether to work an extra day.
 The reason why this is relevant is that, in making
decisions, our interest is essentially on change in
costs and benefits rather than their totals.
 Decisions are rarely made on an ‘all or nothing’
basis; instead they often tend to be made at the
margin: if MB>MC; Go ahead and if MB<MC; do
not.

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4. Efficiency and equity
 Efficiency describe the relationship between inputs
and outputs; which in turn can be valued
respectively in terms of costs and benefits.

 Concerned with maximizing benefits with the

resources available, or minimizing costs for a given
level of benefit.

 Every level of a health system faces questions about

efficiency.

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Cont…
 E.g.
• length of stay could be reduced;
• staff productivity could be increased;
• equipment could be fully utilized and maintained
regularly;
• over-prescribing of drugs could be avoided;
• drug ordering and storage could be managed
properly to avoid wastage and pilfering;
• nurses could replace doctors when appropriate;
• low-cost equipment could replace staff when
appropriate;
• day surgery could replace inpatient stays.

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Cont…

 Equity is about the distribution of benefits as

opposed to their maximization (as in efficiency)
 Equity usually has something to do with fairness
and justice.
 It is subjective, as it will mean different things to
different people and different communities.
 Equity is different to equality.

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Application of Economics to Health
 Health planning- basically about choice
 The analysis of the economic costs of diseases
 Benefits of control programmes - returns from
investments in education and training
 Aspects of health problems - type, quality,
quantity and prices of the resources used

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Cont…

 Population problem
 The quantity and quality of resources
allocated to the health area,
 The medical industry’s efficiency,
 Losses due to illness, disability and premature
death.

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Questions health economics address
 How much of society's resources are devoted to
health and to health services?
 What priority is given to different aspects of
health and health services?
 What health services are people willing to pay
for?
 What choices are made in the pursuit of health
and the improvement of health services?
 What are the results of these choices in terms of
resource use and their impact on health?

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Cont…

 What are the direct and indirect costs?

 What is the relation between the economy as a
whole and health?
 What impact do health services have on the
economy as a whole?
 How far do changes in the environment and the
state of natural resources affect health and what
are the costs?
 How efficient and effective are health services
and how are they distributed in the community?
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 Classification of Economics
Macroeconomics
 Macroeconomics is concerned with the interaction

of broad economic aggregates

 Such as general price inflation, unemployment of

resources in the economy and the growth of

national output (GDP).
 Evaluate overall/general price level in a country

economy.
 Concerned with the interaction between different

sectors of the economy (‘macro’ implies large

scale).

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Cont …
Microeconomics
 Concerned with the decisions taken by individual

consumers, households and firms.

 Individual decision-making units (‘micro’ implies

small scale)
 Concerned with interaction of decision making

units in a market for a commodity.

 E.g. Decision making by Pepsi, business

companies, teff output, …

 Foundation of macroeconomics.

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Positive Economics and normative
economics
 PE
 Describes the facts and behavior in the economy

 concerned with describing and explaining how choices are

actually made
 Refers to economic statements that describe how things

are.
 Such statements can be universally true, true in some

circumstances or universally false.

 This can be established through empirical research.

E.g What will be the effect of higher cigarette taxes on

the number of smokers?

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Normative Economics
 Refers to economic statements that prescribe how
things should be/ought be.
 Such statements can be informed by positive
economics but can never be shown to be true or
false since they depend on value judgments.
 Involves ethics and value judgments
 Political decision, not by economic science
 E.g: “Health care is a basic right and should
be provided free”
 Political decision
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.

THANK YOU

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