1. What Are Economics And Health Economics? Farid Abolhassnai M.D. بسم الله الرحمن الرحيم

3. Don’t Panic

4. Learning Objectives After working through this chapter, you will be able to: explain what economics is and the problems it seeks to solve describe what is meant by efficiency and opportunity cost define and use a number of fundamental economic concepts explain why economics is applicable to health define health economics and describe the scope of health economics

5. Key Terms Allocative (Pareto, social) efficiency: A situation in which it is not possible to improve the welfare of one person in an economy without making someone else worse off. Commodities (or production outputs): The results of combining resources in the production process. They are either goods or services. Demand (economic): The relationship between the price of a good and the quantity demanded (economic definition). Market: Any situation where people who demand a good or service can come into contact with the suppliers of that good. Normative economics: Economic statements that prescribe how things should be.

6. Key Terms Opportunity (economic) cost: The value of the next best alternative forgone as a result of the decision made. Positive economics: Economic statements that describe how things are. Production possibilities frontier (PPF): A graph that illustrates the different combinations of outputs that are achievable with a limited set of resources. Resources: Every item within the economy that can be used to produce and distribute goods and services; classified as labor, capital and land. Utility: The happiness or satisfaction a person gains from consuming a commodity. Welfare (or social welfare): The happiness or satisfaction a population gains from consuming a commodity.

7. Common Economic Questions At what level should hospital user charges be set? Are taxes on cigarettes a useful way of promoting health through reducing the prevalence of smoking? Which is the more effective method of increasing the take-up of health services: price controls or subsidies? How should doctors be paid?

8. Definition of Economics The systematic study of resource allocation mechanisms The systematic study of resource allocation mechanisms social behavior institution scarcity making choices It can be applied to any social behavior or institution where scarcity exists and there is consequently a need for making choices. The behavior of people and institutions in making choices about scarce resources is to some extent predictable. People on the whole act in a way that makes them and their families better off rather than worse off

9. Primary Concern of Economics 1.What products are being produced and in what quantities? (For example: what types of malarial prevention measures are being provided and how much of each type?) 2.By what methods are these products produced? (What resources are required to produce these malarial prevention measures?) 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? (Can we get the same amount of protection from malaria using fewer resources? Would an AIDS awareness campaign be a more effective use of resources than malarial prevention?)

10. The ECONOMY All the economic activities and institutions (that is, anything involving scarcity and choice) within a geographically defined area All the economic activities and institutions (that is, anything involving scarcity and choice) within a geographically defined area

11. Resources Every item within the economy that can be used to produce and distribute goods and services 1- Labor: human resources, both manual and non-manual, skilled and unskilled. 2- Capital: goods that are used to produce other goods or services, for example machinery, buildings and tools. 3- Land: all natural resources. It also refers to manufactured consumables (i.e. almost everything else that does not fall under labor or capital).

12. Production Combining resources (that are not useful in themselves) to make something that is useful Production ResourcesCommodities Production ResourcesCommodities Final Product Intermediate Product Final Product

13. Utility and Welfare Satisfaction or Happiness provided by commodities Satisfaction or Happiness provided by commodities Utility Welfare

14. The characteristics that distinguish commodities Physical attributes Ice cream and a cup of tea Date or time Ice cream in summer vs. ice cream in winter Place A cup of tea in a fashionable café vs. tea in local supermarket

15. What could be done with a commodity or resource Consumption: using up a commodity in order to increase their utility Investment: using up a commodity to make other commodities for subsequent benefits Exchange: trading a commodity for some other commodity or resource

16. Alternative Uses of A Resource Resource or commodity Other commodities ProductionExchange Consumption Increased Utility

17. Markets Any situation where people who demand a good or service can come into contact with the suppliers of that good. For it to be a market the buyers and sellers do not have to physically meet

18. The Flow of Money, Resources and Commodities Households Consumption Investment Production Firms Resources Money Commodities Money Price : The amount of money that is exchanged for a commodity Free Market

19. Government interventions in the market Levying taxes Fixing prices Licensing suppliers Regulating quality Prohibit private demand Prohibit private supply

20. Continuum of Economies Free Mixed Command

21. Production Possibilities Frontier

22. Production Possibilities Frontier (Concave to the origin)

23. Opportunity Cost opportunity cost The opportunity cost of an action is: best alternative action The level of benefit one would have got from the best alternative action opportunity cost The opportunity cost of an action is: best alternative action The level of benefit one would have got from the best alternative action

24. Production possibilities frontier for the economy Opportunity Cost

25. Efficient, Inefficient, Not feasible

26. Shift of PPF

27. Important Conclusions If a system is operating inefficiently then it is possible to produce more commodities and therefore more welfare with current resources. If a system is already operating efficiently, then to increase the quantity produced of one commodity you have to reduce the quantity produced of some other commodity. There is a trade-off, an opportunity cost. The only other way that more of every product can be produced is: – technological improvement – an increase in the amount of resources available (such as an increase in population).

28. Microeconomics Microeconomics is concerned with: – the decisions taken by individual consumers and firms and; – with the way these decisions contribute to the setting of prices and output in various kinds of market

29. Macroeconomics Macroeconomics is concerned with the interaction of broad economic aggregates such as: – general price inflation; – unemployment of resources in the economy; – the growth of national output and – equity

30. Positive Economics Positive economics 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.

31. Normative Economics Normative economics refers to economic statements that prescribe how things should be. Such statements can be informed by positive economics but can never be shown to be true or false since they depend on value judgment.

32. Can economics be applied to health? Scarcity of resources The provision of one service, X, necessarily means that a second service, Y, is displaced The opportunity cost of providing service X = The health gain that we would have got from service Y It is also important to be concerned about those who receive the service X Economists try to making such rationing decisions explicit

33. The Mission of Health Economics Health economics is not concerned with ‘saving money’ but with improving the level and distribution of population health with the resources available Health economics is not concerned with ‘saving money’ but with improving the level and distribution of population health with the resources available