lec slides for topic 1

1. Introduction to
Economics and Health
Economics
Health Economics 1, Semester 1
.
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2. What is economics?
Part 1
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3. Outline of this session
• What is economics? [Spoiler alert - it is not about money]
– What does it mean to think like an economist
• What is health economics?
• Why is health economics important?
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4. What is economics?
Definitions of economics:
“Economics is that way of understanding behaviour that starts from the assumption that people
have objectives and tend to choose the correct way to achieve them”. Price Theory, David D. Friedman,
1986
“Economics is the science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.” An Essay on the Nature and Significance of Economic Science, Lionel
Robbins, 1932
Economics derives theories of behavior (about individuals and in aggregate) & empirically tests
predictions from those economic theories.
Tessa’s – The science and ethics of resource allocation. 4

5. Economic problem: unlimited wants combined with scarce
(finite) resources
Can you think of any
resources that are not
scarce?
?
Can you think of any
‘wants’ that are not
limited?
?
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6. What is economics?
How economists think:
Comparability:
➢ Economists assume that the different things we value are comparable. In other words,
apples can be compared with oranges because in economics the different things a
person values can all be measured on a single scale (what is that?)
➢ Even if one thing is much more valuable than another, a sufficient small amount of the
more valuable good is equivalent to some amount of the less valuable.
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7. What is economics?
How economists think:
We all have to make decisions and will trade-offs (costs vs benefits):
➢ We can think of trading-off medical care versus other goods and services
➢ The economic concept of enough medical care is that amount such that the
improvement in your health from buying more would be worth less to you than the
things you would have to give up to pay for it.
➢ You are buying too much medical care if you would be better off (as judged by your
own preferences) buying less medical care and spending the money on something
else.
➢ Trade-offs can be hidden or implicit within decision making – economists prefer trade-
offs to be transparent
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8. What is economics?
How economists think:
Opportunity costs matter:
➢ Sensible questions have alternatives – should I watch a movie or go for a run
➢ Opportunity cost is “The benefit forgone of the next best alternative”
➢ Costs and benefits arising now AND in the future matter
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9. What is economics?
How economists think:
Wants, not needs are important:
➢ How much you need could presumably be determined by the appropriate expert and
has nothing to do with what such things cost or what your particular values are.
➢ The economist replies that how much of each of these things you will, and should,
choose to have depends on how much you value them, how much you value other
things you must give up to get them…..Your choices depend, in other words, on your
tastes and on the costs to you of the alternative things that you desire (i.e. want).
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10. What is economics?
How economists think:
How much we value something can (sometimes) be ‘revealed’ by actions (revealed
preference):
➢ How much we value something is properly estimated not by our words but by
our actions.
➢ So, economic value is simply value (i.e. the degree of want) to individuals as
judged by them (consumers) and revealed in their actions
(purchasing/consumption).
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11. What is economics?
How economists think:
Things are interrelated
➢ Overtime – expectations for future/outcomes from past can be relevant
➢ Between markets - One market can influence another market e.g. increase in
average female wage rate and demand for childcare
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12. What is economics?
How economists think:
People respond to incentives
➢ People/organisations respond to changes in costs/benefits of actions
➢ Some consequences can be predicted – but always need to consider
unintended consequences
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13. “Cobra effect”
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Delhi, India. British Colonial
Government introduced bounty on
Cobra snake skins.
This anecdote used to describe
negative unforeseen consequences
arising from financial incentives.
See https://fee.org/articles/the-
cobra-effect-lessons-in-unintended-
consequences/

14. New York Times, 1908 [reporting from Paris]
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15. Microeconomics vs macroeconomics
Macroeconomics
• A branch of economics dealing with the
performance, structure, behaviour, and
decision-making of the whole economy
• e.g. unemployment, inflation
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Microeconomics
• A branch of economics dealing with the
structure and performance of the market,
behaviour and decision-making of the
individual/household(consumer) and the firm
(supplier) – small units within the economy
• e.g. demand for goods, market prices

16. Positive versus Normative
Positive
• Facts about ‘what is’
• Description of reality
• Explains cause and effect
• Meant to be value free – but values may
be hidden in the theoretical framework,
the assumptions, the choice of research
question etc.
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Normative
• A judgement about ‘what ought to be’
• Prescriptive

17. What is economics
Part 2
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18. How economist think
1. We can compare things (even apples and oranges or years of life and quality of life) when we
place them on a scale of how much we value them
2. We all make decisions in which there are trade offs
3. Decisions will have benefits and forgone benefits (opportunity costs)
4. People respond to incentives – caution needed over unintended consequences
5. Things are inter-related (over time, across individuals/groups/markers)
6. People reveal preferences through their actions (mostly)
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19. What is economics?
How economists think:
They often disagree
Why would eminent economists disagree about the “efficiency” of market-based or government-
oriented health care systems?
• Because there are important ideological issues involved that underpin normative
pronouncements
• Agreeing objectives for our health care system inevitably involves judgements about issues of
social justice and equity
See table by Alan Williams on libertarianism versus egalitarianism – to be debated in Tutorial 1
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20. LIBERTARIANISM EGALITARIANISM
Personal
Responsibility
Personal responsibility for achievement is important
and weakened if people are offered unearned rewards.
Moreover, such unearned rewards weaken the motive
force that assures economic well-being and in so doing
they also undermine moral well-being because of the
intimate connection between moral well-being and the
personal effort to achieve.
Personal incentives to achieve are desirable, but economic
failure is not equated with moral depravity or social
worthlessness.
Social Concern Charity is the proper vehicle but it needs to be
exercised under carefully prescribed conditions
(e.g. the recipients must first mobilise all their own
resources, and when helped, must not be better off than
those who are self-supporting).
It is preferable to establish social mechanisms that
create and sustain self-sufficiency and that are accessible
according to precise rules concerning entitlement that are
applied equitably and explicitly sanctioned by society at
large.
Freedom Freedom is to be sought as a supreme good in
itself. Centralised health planning and a large
government role in health care financing are seen
as an unwarranted abridgement of the freedom of
clients as well as of the health professionals and private
medicine.
Freedom is seen as the presence of real opportunities of
choice. Freedom is not indivisible but may be sacrificed
in one respect in order to obtain greater freedom in
some other. Government is not an external threat to
individuals in society but is the means by which individuals
achieve greater scope for action (i.e. greater real freedom).
Equality Equality before the law is the key concept, with clear
precedence being given to freedom over equality
wherever the two conflict.
The main emphasis is on equality of opportunity. Where
this cannot be assured the moral worth of achievement is
thereby undermined. 20

21. 21

22. How to do economics well
1. Practice good scientific method
• good reasoning, hypothesis development, predictions and testing, appropriate statistical
analysis, reproducible research, critical thinking
2. Be aware of the appropriate objectives (what should we be trying to maximise)
3. Think like an economist
4. Understand other perspectives and viewpoints
5. Be aware of your own biases
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23. Key notions of economists
1. Scarcity of resources and hence the need for making choices
Resources (land, labor, capital) are scare (i.e. not unlimited)
2. Opportunity cost
= The benefit forgone of the next best alternative
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24. 24
Leisure
Work
0
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8
16
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• Currently, you spend 16 hours on leisure and 8
hours on work every day
• Now, you need money for wedding. So, changed
to spend 8 hours on leisure and 16 hours on work
• Your opportunity cost of 8 hours more for
work is 8 hours less for leisure
Sacrifice in leisure
Increase in work
The real cost of any trade-off…

25. Key notions of economists
3. Analysis should occur at the margin
When questions are about ‘How many?’ of something is ideal (e.g. people to employ or apples to
buy) it’s simpler to ask should I do one more (e.g. should I employ one more person or buy one
more apple).
So, ideally the analysis should occur at the margin.
Based on the current position what are the implications of a small change i.e. cost of an increase in
production by one unit (marginal cost), or benefit of increased consumption by one unit (marginal
benefit).
We should keep doing more of something as long as the marginal benefit > marginal cost.
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26. Health status increases as
more and more health care
inputs are added to the
production process.
Diminishing marginal
product – as more and more
health care inputs are added
to the production process,
the increments in heath
status diminish.
Total product and marginal product of health care

27. What is health
economics?
Part 3
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28. Health economics
• Sub-discipline of economics. Mainly micro based – using economic theories and
empirical techniques and applying them to health and health care
• Concerned with the ‘market’ for health
• Demand individuals have for health itself and health care
• Supply of health care
• Explores the distinguishing features of health care markets and implications
these have both for the best ways to deliver health care and the limitations of
traditional economic tools for studying health care markets
What is health economics

29. Seminal paper by Arrow (1963) - Factors that distinguish health
care markets
• Extensive government intervention
• Intractable uncertainty in several dimensions
• Will I get sick? When will I get sick? How sick will I get? Will the treatment work? etc.
• Subject to external shocks
• Varies by health condition
• Asymmetry of information (i.e. one party in an economic transaction has more
knowledge than the other party)
• Barriers to entry
• Externalities (e.g. contagious disease)
• Arrow didn’t discuss equity issues or consider the importance of caring externalities
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30. B. Influences on health (other than
health care) e.g. genetics, income etc.)
Thescopeofhealtheconomics
A. What is health? What is its value?
Measurement and valuation of health
G. Planning, budgeting,
monitoring & regulation H. Evaluation at the
whole system level
C. Demand for healthcare
D. Supply of healthcare
F. Economic
evaluation
E. Market
analysis
The scope of health economics

31. Why study ‘Health’ economics?
➢ All health systems are concerned with the efficient use of scarce resources
➢ Through understanding the benefits and costs of alternative options health
economics can support decision making on:
• How healthcare should be funded?
• What treatments/interventions should be provided?
• How it should be provided? (community or hospital; private or public etc.)
• And who should get it?
➢ Health policy involves both positive (technical, fact based) and normative (value
judgement) engagement
• e.g. ‘the elderly have very high medical expenses and the government should subsidize their
health bills’
Why study health economics?

32. What can economics contribute to health policy?
Description - What is
• Health Expenditure – National & International Comparisons
• Burden of Disease (BoD) Studies, Cost-of-illness
• Describing different health care systems
Prediction - What might be
• Aged care cost escalation
• Future BoD
• What will happen if economic incentives change e.g. demand for tobacco following a tax change
• Likely consequences of health policy or reform
Evaluation - What “should” be
• Which treatments should be funded from collective funds
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33. What is ‘Economic Evaluation’?
Economic Evaluation is “The comparative analysis
of alternative courses of action
in terms of both their costs and consequences
in order to assist policy decisions”.
Three main approaches used in the economic evaluation of health care:
1. Cost-effectiveness analysis
2. Cost-utility analysis
3. Cost-benefit analysis
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34. 1. Cost-effectiveness analysis (CEA)
CEA measures benefit as natural health unit
Intermediate health outcomes (indicators)
• Vaccine uptake, attack rate
• Glucose control (HbA1c)
• Diastolic blood pressure
• Adverse event averted
Final health outcomes (health status)
• Survival expressed as life years gained (LYs)
• Episode-free days
• Disability days avoided
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35. 2. Cost-utility analysis (CUA)
CUA measures benefit as units of life years adjusted for their quality
• Quality Adjusted Life Years (QALYs)
• Disability Adjusted Life Years (DALYs)
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36. Trends in leading
causes of disease
burden
- Australia, 2003-2023
projected (Burden of
disease)
DALYs are often used to show the overall Burden of Disease

37. 3. Cost-benefit analysis (CBA)
CBA measures benefit (improving quality
of life AND extending length of life) in $
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38. 38
Thankyou.
More next week!