Eco

1. INTRODUCTION TO HEALTH ECONOMICS
By Biruk T (MPH in HSM)

2. Learning Objectives
2
At the end of this chapter, the student will be able
to:
1.Understand the meaning and purpose of
economics
2.Explain the basic concepts and principles in
economics
3. know the major branches and approaches of
economics
4.Differentiate the types of economic systems
5. Understand the impact of economy on health
and vise versa

3. 3
WHAT IS ECONOMICS?
 Economics:- is defined as the study of allocation of
scarce resources among competing wants so as to
“maximize” the satisfaction of those wants.
 “the study of how people and society end up
choosing with and without money, to employ scarce
resources that have alternative use to produce various
commodities and distribute them for consumption
now or in future among various persons and groups in
the society”.
 It analyses the costs and benefits of improving
patterns of resource allocation.

4. 4
Cont’d…
 “Economics is the study of how societies use
scarce resources to provide valuable
commodities and distribute them among
different groups”.
 “Economics is the science of choice.
 It studies how people choose to use scarce
resources to produce various commodities and to
distribute these goods to various members of the
society for their consumption”.

5. 5
 economics is the study of how people make choices.
 It is also the study of scarcity and choice, finally helps
how to use scarce or limited resource.
 The word economics drived from two Greek words-
oikos(“house”) and nomos(“custom”, or “law”) means
rules of house(hold for good management).
 The subject matter of economics lies on the
production, distribution and consumption of
economic goods.

6. 6
Cont’d…
 “Economics is the study of commerce among nations.
It explains why nations export some goods and import
others and analyze the effect of putting economic
barriers at national frontiers.”
 The definition implies:-
 1. The productive resources are scarce
 2. Human wants are infinite, so go far beyond the
ability of our productive resources to satisfy them all.
 3. Then we face a major problem in ‘economizing”
those productive resources so as to satisfy the largest
possible number of our wants.

7. 7
How do we economize(spend less) ?
 Given the limited resources, we must choose what
to have and what to forgo, at both personal and
national levels.
 This means we must establish priorities among the
various alternatives.

8. 8
Basic economic problem
 A finite limit to resources i.e. Scarcity (time, cash
etc.)
 The desire for goods and services is infinite or
rather demand is insatiable with in current
resources, (U.S.A spends 14% GNP vs U.K 6.5%,
yet still has unmet need).
 There are many beneficial interventions, but
which should be funded.
 Choice can not be avoided. Therefore, decisions
have to be made.

9. 9
Cont …
 Economics is
Assumes resources are scarce
Is about benefits
Is about evaluating services
Is about providing information to assist in the
allocation of scare resources.
 Economics is concerned with making the most of
societies resources.

10. 10
Economics of Health
 According to Culyer “is the application of the
discipline of economics to the subject matter of
health.
 It encompasses the full range of two-way casual
relations between the health status of individuals
and groups and their economic activities.
 It is concerned with production, distribution and
exchange of health services.

11. 11
Cont’d…
 Economics of Health Care: on the other hand
restricts itself to a particular set of goods and
services.
 It studies the processes and institutions which
govern allocation of scarce social resources to
these activities, the choice of techniques of
production and mix of outputs and the distribution
of health care among the end users (consumers or
patients).

12. 12
Concepts and Principles in Economics
 Scarcity:
 Is an important concept in the above definition
because it implies choices have to be made
regarding how and where to use limited resources to
address unlimited human wants.
 Opportunity Cost:
 Is the value of the next best opportunity given up in
order to enjoy a particular good or service (Amacher
& Ulbrich, 1986).

13. 13
Cont’d…
 Opportunity costs of a chosen product are the
benefits of the next best alternative not chosen.
 Opportunity cost:
This economic concept is quite important and
usually forgotten in costing.
It is the value of the next alternative forgone in
order to achieve something.
The economist’s notions about opportunity costs
implies that the costs of providing one form of
health care should always be balanced against the
benefits which have to be sacrificed.

14. 14
Cont’d…
Prioritization and choice:
 Choice on how to use scarce resources requires
prioritization of health interventions on some agreed
criteria.
 The costs and benefits of alternative strategies or
interventions have to be compared.

15. 15
Three Basic Questions of Economics
1. What to produce?
2. How to produce?
3. For whom to produce?

16. 16
What? How? For Whom?
Process
Input Out put
Methods & Techniques
Technology
Land Gun
Labor Butter
Capital Health Services
Enterprise Textiles

17. 17
Cont’d…
Efficiency: measures whether healthcare resources are
used to get the best value for money.
Three types efficiency:
1. Allocative Efficiency:- the allocation of resources to most
socially valuable uses.
2. Technical efficiency:- the best use of resources to achieve
a given end.
3. Cost-efficiency:- the delivery of a given amount of goods
or services with least cost as measured at market prices.
 It is called productive efficiency, maximization of health
outcome with a given cost or minimization of cost for a
given health outcome.

18. 18
CLASSIFICATION OF ECONOMICS
 Economics is classified by level and type of
issues it deals with as:-
ECONOMICS
Macro economics Micro economics

19. 19
Classification ….
Microeconomics:- deals with the behavior of individual
economic agents (households, firms, perhaps cities
and clubs) and of a particular markets and industry.
 It is about scarcity and choice, with individual
markets and goods, price mechanism, and how it
works.
 It deals with production, consumption, and exchange
decision with emphasis on supply, demand and price
mechanisms and how they direct economic activities.

20. 20
Cont’d…
Macroeconomics:- deals with the problem that apply
to economy as a whole. That is aggregate level of
economic activity including output, employment,
and prices.
 It is the study of the rate of flow in the economy
(income, unemployment, output spending,
investment, etc) and what factors influence this
rate of flow.

21. 21
Classification of Economics
 Classification based on whether it is prescriptive
(telling people what should be done) and descriptive
(saying what sb/sth is like)
Positive Economics:- describes, explains and predicts
economic facts and behavior.
o It deals with objective scientific explanation of
economic happenings like, what will be the effect of
higher taxes on tobacco consumption? How does
higher price on bread affect the demand for bread,
etc.
o It is concerned with how things are.

22. 22
Cont’d…
Normative Economics:- is about what “should be” or
“ought to be” (what is the right thing todo).
 It is prescriptive by nature and involves ethics and
value judgment.
 Examples are: should the government give money to
the poor? Should budget deficit be financed through
higher taxes or lower spending?

23. There are four types of economic
system
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 Traditional
 Command
 Market
 Mixed

24. Traditional economic system
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 Produce products and services that are a direct
result of beliefs, customs, traditions, religions etc.
 Apply in rural area and nomadic population
 Found in second or third world countries
 In general, surplus is a rare thing.
 Example-afghanistan or bhutan

25. Command economic system
25
 The next step up from a traditional economy
 Centralized control –a large part of the economic
system
 Government own everything including industrial
processes
 Many communist fall into this category.
 Example-north Korea, china

26. Market economic system
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 The government does not control vital resources
 Organizations run by the people
 Price is allowed to fluctuate freely based on
supply and demand
 Prevents the government from becoming too
powerful, too controlling
 Is very similar to free market
 No truly free market economy exists in the world.
 Example-USA, Japan, Germany

27. Mixed economic system
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 Also known as dual economy
 A mixture of market and command economy
 The market is more or less free of government
ownership, except for a few key areas.
 In America government programs such as
education,trasportation etc.
 Example-India, Indonesia

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Health economics
 Health economics can be defined broadly as the
application of the theories, concepts and techniques of
economics to health sector. It is concerned with such
matters as [according to Lee and Millis]:
o The allocation of resources to various health activities
o The quantity of resources used in health delivery
o The efficiency with which resources are allocated and
used for health purposes
o The effect of preventive, curative and rehabilitative
health services on individuals and society
o The organization and funding of health institutions.

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Health, Development and economics
 Development is a comprehensive concept. According
to UNDP it includes:
o Income distribution
o Level of education and skill
o Health status of population
o Gender balance
o Political representation
o Natural resources management and others.

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Impact of Economy on Health
 Growth on its own does not guarantee improved
health status. It depends on:-
 How growth takes place
 How benefits are distributed
 How benefits are reinvested
 How public spending is used
 Who controls resources in the family and their
priority.

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Impact of Health on the Economy
 Healthier population are more productive
 High attendance
 Better skill level
 Increased life expectancy leading to decrease in time
preference and increased investment.
 Effect on population structure is hard to say:
 Good health can lead to prolonged life. But prolonged
life can either lead to productive working life or a high
ratio of dependent and financial burden.
 The assumption that reduction IMR will be followed
by reduction in fertility may not always hold.

32. 32
Impact of Economy on Health
 Economic growth had also unfortunate consequences.
 Disease of affluence (cancer, heart diseases,
depression…)
 Developing countries are also facing “double burden”
of diseases
 Old: malaria, TB, etc.
 New: cancer, heart diseases, etc

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Impact of Health on Economy
 Is large population size an economic asset or liability?
 Health is fundamental to wellbeing of the individual.
 Generally there is correlation between economic
development and health status:
L.E & GNP/GDP
IMR & GNP/GDP

34. 34
Health and Economy
 The relationship between health and economy show a
two-way interaction.
Health Economy

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Thank you!!