Introduction to Health Economics

Economics Basics

• Economics studies allocation of scarce resources: what, how, and for whom to produce.
• Health economics applies economic principles to healthcare production and consumption.

Key Economic Terms

• Economic efficiency: all scarce resources allocated to highest-value use; no waste.
• Marginal cost (MC): \Delta total cost from producing one extra unit.
• Marginal benefit (MB): \Delta total benefit from one extra unit consumed.
• Opportunity cost: best alternative foregone when a choice is made.
• Utility: satisfaction gained from consuming goods/services.
• Trade-off: giving up one benefit to gain another.

Efficiency in Health Economics

• Allocative efficiency: resource mix maximises total surplus (consumer + producer).
• Productive efficiency: goods/services produced at lowest possible cost (best input mix).
• Equity: fair opportunity for all to reach full health potential.

Supply and Demand Fundamentals

• Demand: quantities consumers will buy at alternative prices; slopes downward.
• Supply: quantities producers will offer at alternative prices; slopes upward.
• If demand \uparrow with supply constant → higher equilibrium price & quantity; demand \downarrow → lower price & quantity.
• Consumer behaviour assumptions: rational, utility-maximising, informed, budget-constrained.
• Producer behaviour assumption: profit-maximising, cost-minimising.

Demand Curve Dynamics

• Movement along curve: caused solely by price change.
• Shift right (increase): higher income, better quality, advertising, higher price of substitutes, lower price of complements, expectations of future price rise, favourable trends.
• Shift left (decrease): opposite factors or economic downturn.

Supply Determinants

• Output price: direct relationship with quantity supplied.
• Input prices & availability: higher costs shift supply left; lower costs shift right.
• Technology: productivity improvements shift supply right.
• Number of suppliers: more sellers shift supply right.
• Government policy, natural conditions, prices of related goods also shift supply.

Market Equilibrium

• At equilibrium price P^, quantity demanded = quantity supplied Q^.
• Price below P^ → excess demand (shortage); price rises toward P^.
• Price above P^ → excess supply (surplus); price falls toward P^.

Healthcare-Specific Demand & Supply

• Healthcare demand is derived from demand for health ("health capital").
• Individuals act as consumers, producers, and contributors within the health system.
• Factors influencing healthcare demand: income, prices, government policies (e.g., subsidies), and availability of supply.

Grossman Model (1972)

• Individuals both consume and produce health; health treated as a depreciating stock.
• Health yields direct utility (well-being) and indirect utility (fewer sick days).
• Investments in health (medical care, lifestyle) raise the health stock; depreciation lowers it over time.