Health Economics

Lecture one

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Basic Health Economic
Questions.
 What is health?
 How much should be spent on it?
 How much value do people set on it?
 How to produce health and health
services?
 How do we allocate resources?
 How do we define and measure Health?
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What is Economics?
Economics is a social science that
studies issues relating to the choices of
how to use scarce resources to satisfy
unlimited human wants.

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Central Issues in
Economics

 Unlimited wants

 Scarcity of resources

 Choice or prioritization

 Opportunity cost

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Definitions

 Economics: the study of how choices

are made on how to employ scarce
resources (that could have been
available for alternative uses), to
produce various commodities, and
distribute them for consumption. 5
 Resources

 Resources (or factors of production or inputs)

are every item within the economy that can
be used to produce and distribute goods &
services.

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 Resources

 They are classified as:

 Labour (human resources)
 Capital (goods that are used to produce other
goods or services); Land (all natural resources)
 Enterprise (the ability to combine the other
factors in the production process)
 Time
A resource can be employed in one of three ways:
consumed, invested or exchanged. 7
5 Fundamental questions
in economics
 What to produce (Allocative Efficiency)
 How to produce (Technical Efficiency)
 When to produce (timeliness)
 For whom to produce (Distributive
Justice, equity)
 How much to produce (quantity,
Coverage)

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 What do we produce?
 What combination of services best address
the priority problems of the population we
serve
 Across all sectors
 Within the health sector

 How much resources do we allocate to each?

 Often a political decision
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How do we produce them?

 Labour or capital intensive?

 Highly specialised or non-specialised

staff?. Ownership: public or private
provision?

 Delivery system: centralised or

decentralised system? 10
For whom do we produce?
 Who benefits & what do they get?

 Who pays & how much? How do we

mobilise the resources?

(Regressive vs. progressive systems)

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 These fundamental decisions
determine both the macro &
microeconomic policies

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Macroeconomics
 Applies to the whole economy

 Concerns economic growth, inflation,

the balance of payments

 Macroeconomic policies are: monetary

policy, aggregate fiscal policy, exchange
rate policy
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Macroeconomic
Policies
 Monetary policy – government’s
powers to control the supply of
money, interest rates, and exchange
rates in economy
 Fiscal policy – the government’s
power to tax and spend part of the
national income to achieve certain
predetermined national objectives.

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Macro economic Policies

 Supply side policy – government’s power

to directly influence production and
supply conditions in the economy

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Microeconomics
 Applies to specific markets, industries,
or sectors

 Concerned with how scarce resources

are allocated

 Microeconomic policies include: tax

policies, subsidies, regulation
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Example of a microeconomic
policy
Government removed taxes on mosquito nets in
the 2001 budget

The objective was to encourage the public to

use mosquito nets, and thereby reduce
malaria

The rationale is that demand for mosquito nets

will increase if the price falls because of the
removal of the tax
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Key policy questions to
consider
 What will happen to revenue?
 By how much must we reduce the price
to increase responsiveness substantially
 Is responsiveness the same at different
levels of prices?

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Rule of thumb

 If demand is inelastic, a price increase

(e.g. caused by increasing tax will
always increase revenue)

 If demand is elastic, a price decrease

will increase revenue

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 Efficiency

 Is an important concept in economies,

which should guide policy formulation
 An efficient allocation of resources
occurs when the marginal cost of
producing a good equals the marginal
benefit of that good to consumers
 If the marginal cost of producing a
good exceeds marginal benefits to
consumers, resources are being wasted
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Will Economic Growth
Reduce Poverty?

This depends on three conditions:

 If the poor participate in economic
growth activities this will lead to
increased incomes for them
 If the benefits of the growth are
distributed equitably among people
 If focused on PMA (Uganda case)

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 Growth of the economy
over time
Actual GDP

GDP Recovery
Peak Potential GDP
Recession

Trough

YEAR

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Terminologies Defined
 Recession – economic downturn,
usually involving reduction in output
for two successive quarters
 Depression – prolonged recession
with low output and high
unemployment
 Recovery – upturn in the economy
with rise in investment and reduction
in unemployment

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Terminologies Defined

 Peak – the height of a boom or upturn in

the economy
 Trough – the bottom of a recession or
depression

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Gross Domestic Product
Gross Domestic Product – is the
monetary value of the total
output of final goods and
services produced by factors of
production located in an
economy. It is may be seen from
three different perspectives:

1. Expenditure perspective
2. The perspective of “values
added”
Income claims by factors of
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3.
Unemployment

Unemployment – is the proportion

of the labor force interested
capable to work but currently out
of work
Thus,
U = people out of work / Total labor
force
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Forms of
unemployment
 Frictional - Is transitional
unemployment and refers to
unemployment due to the normal
labor turnover. People who are
moving from one job to another
and fresh graduates entering the
labor market may be temporarily
unemployed for the duration of
time it takes to secure a job.

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Forms of unemployment
contd.

 Structural - Refers to
unemployment resulting from
mismatch between the skills
supplied by the labor force and the
demand.
 Cyclical - This is unemployment
associated with business
fluctuations and especially
economic downturns 28