Rift Valley University

Department of Pharmacy

PHARMACOECONOMICS

By: Yitayih K. (B.Pharm, MSc)

Bahir Dar, Ethiopia

Dec 7, 2024
Course contents
 Principles of Economics
 Introduction to pharmacoeconomics
 Decision Analysis and pharmacoeconomic
evaluations
 Costs and Time preference
 Pharmacoeconomic analysis techniques/methods
 CMA
 CEA
 CUA
 CBA

Dec 7, 2024
 INTRODUCTION

Objectives
You will be able to;
 Describe the concept of economics and its

branches
 Discuss how markets work

 Describe the concepts demand, supply and their

interaction in economics
 Describe how markets work in the health sector

 Discuss market failure

Introduction to the principles of Economics Saturday, December 7, 2024

 Introduction to principles of Economics

1.1. Definition of Terms

 Economy
 The word economy comes from a Greek word for “one who
manages a household.”
 It basically refers to just one particular aspect of human
behavior, namely the attempt to make optimum use of scarce
resources to satisfy needs which, by contrast, are numerous
and unlimited.
 It is also the process or system by which goods and services
are produced, sold, and bought in a country or region
Dec 7, 2024
 It includes everything related to the production and
consumption of goods and services.
 goods are the concrete, physical products we produce/manufacture
 e.g.furniture, automobiles, drugs, medical equipments, etc..
 services are the activities we engage in and sell to others
 e.g. medical services such as physician consultation services,
nursing care services
 clinical pharmacy services such as, diabetes mgt service,
asthma mgt service, pharmacokinetic monitoring service,
osteoporosis mgt clinic, and HIV/AIDS mgt clinic, etc.
Dec 7, 2024
 Definition of Terms cont’d

Economics: What is economics?

 It is defined as the systematic study of resource

allocation mechanisms among competing wants so as

to maximize the satisfaction of those wants

 It is the study of how people choose to use and

manage scarce resources to produce commodities and
how these commodities should be distributed

Dec 7, 2024
Definition of Terms cont’d

 It is a social science that examines how people

choose among the alternatives available to them.
 Social -- it involves people and their behavior
 Science - a scientific approach in its investigation of

choices

Dec 7, 2024
Definition of Terms cont’d

Economics can be either:

1. Microeconomics
 Focuses on the choices made by individual decision-

making units in the economy

Typically consumers and firms and the impacts
those choices have on individual markets

Dec 7, 2024
Definition of Terms cont’d

2. Macroeconomics
 Focuses on the impact of choices on the total, or

aggregate, level of economic activity

 Is the total level of economic activity rising or

falling?
 Is the rate of inflation increasing or decreasing?
 What is happening to the unemployment rate?

Dec 7, 2024
 Definition of Terms cont’d
 Both microeconomics and macroeconomics give
attention to individual markets.
 But in microeconomics that attention is an end in itself;
and
 In macroeconomics it is aimed at explaining the
movement of major economic aggregates; the level of
total output, the level of employment, and the price
level.

Dec 7, 2024
Definition of Terms cont’d

Health Economics:
 Can be defined as the application of economic
theories, tools and concepts to the topics of health

and health care.

Dec 7, 2024
 Definition of Terms cont’d

Value: It is the measure of benefit provided by a good

or service to a consumer and it is mostly subjective.
 It is often estimated based on the persons willingness
to pay (WTP) for the good
 It is the exchange qualities of a good
 It is the amount of money that something is worth:
the price or cost of something
 diamond Vs gold

Dec 7, 2024
 Definition of Terms cont’d

Worth: the quality that renders something desirable,

useful, or valuable
Utility: Is the total satisfaction received from consuming
a good or service
 A commodity may have utility but it may not be useful

to the consumer. E.g. Cigarette smoking

 However, demand for a commodity depends on its

utility rather than its usefulness.

Dec 7, 2024
 1.2. The principles of Economics

 A household and an economy face many decisions:

 Society and Scarce Resources:
 The management of society’s resources is important

because resources are scarce.

 Scarcity. . . means that society has limited resources

and therefore cannot produce all the goods and

services people wish to have.
E.g. Radiation therapy for CA patients in Addis
Ababa.

Dec 7, 2024
 Principles of Economics cont’d

 How People Make Decisions (4)

1) People face trade-offs.
2) The cost of something is what you give up to get
it.
3) Rational people think at the margin.
4) People respond to incentives.

Dec 7, 2024
Principle #1: People Face Trade-offs

“There is no such thing as a free lunch!”

Dec 7, 2024
Principle #1: People Face Trade-offs cont’d

 To get one thing, we usually have to give up another

thing.
Guns vs butter
Food vs clothing
Leisure time vs work
Efficiency vs equity

Dec 7, 2024
Principle #2: The Cost of Something is What You
Give up to Get it

 Because people face trade-off, making decisions

require comparing costs and benefits of alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in?

 The opportunity cost of an item is what you give up to

obtain that item.

Dec 7, 2024
Principle #2 cont’d

Dec 7, 2024
Principle #3: Rational People Think at the
Margin

 Marginal changes are small, incremental adjustments

to an existing plan of action.
 People make decisions by comparing costs and
benefits at the margin.
 A rational decision maker takes an action if and only if
the marginal benefit of the action exceeds the marginal
cost.
Dec 7, 2024
Principle #4: People Respond to Incentives

 An incentive is something (such as the prospect of a

punishment or a reward) that induces a person to act.
 Marginal changes in costs or benefits motivate people
to respond.
 The decision to choose one alternative over another
occurs when that alternative’s marginal benefits
exceed its marginal costs!
 Eg, basketball star, L.James
Dec 7, 2024
 HOW PEOPLE INTERACT (3)

5) Trade can make everyone better off.

6) Markets are usually a good way to organize

economic activity.

7) Governments can sometimes improve

economic outcomes.

Dec 7, 2024
Principle #5: Trade Can Make Everyone Better
Off
 People gain from their ability to trade with one
another.
 Competition results in gains from trading.
 Trade allows people to specialize in what they do
best.
 Apple and Sony companies

Dec 7, 2024
Principle #6: Markets Are Usually a Good Way
to Organize Economic Activity

 A market economy is an economy that allocates

resources through the decentralized decisions of
many firms and households as they interact in markets
for goods and services, for example
 Households decide what to buy and who to work for.
 Firms decide who to hire and what to produce.

Dec 7, 2024
Principle #6: cont’d

 Free Market Economy

 An exchange economy with little government
interventions
 Command economy
 A market economy with substantial government
involvement
 Mixed Economy
 Middle Ground

Dec 7, 2024
Principle#7: Governments Can Sometimes
Improve Market Outcomes
 Market, any established operating means or exchange for
business dealings between buyers and sellers.
 Market failure occurs when the market fails to allocate
resources efficiently.
 Market failure can be viewed as a scenario in which
individuals' pursuit of self-interest leads to bad results for
society as a whole
 When the market fails (breaks down) government can
intervene to promote efficiency and equity

Dec 7, 2024
How the Economy as a Whole Works
(3)

8: A Country’s Standard of Living Depends on Its

Ability to Produce Goods and Services

9: Prices Rise When the Government Prints Too

Much Money

10: Society Faces a Short-Run Trade-off between

Inflation and Unemployment

Dec 7, 2024
Principle #8: A Country’s Standard of Living
Depends on Its Ability to Produce Goods and
Services.

 Productivity - the quantity of goods and services

produced from each hour of a worker’s time.

Dec 7, 2024
Principle #9: Prices Rise When the
Government Prints Too Much Money

Inflation and Deflation: what?

 In economics, terms used to describe, respectively, a

decline or an increase in the value of money.

 Inflation, an increase in the overall level of prices in

the economy
 Deflation is a decrease in price that typically caused

by depressed economic output and unemployment.

Dec 7, 2024
Principle #10: Society Faces a Short-run Trade-off between Inflation & Unemployment .

 The primary long run effect of increasing the

quantity of money is elevating level of price.
 But the short-run story is more complex & more
controversial.
 Most economists describe the short-run effects of
monetary injections as follows:

Dec 7, 2024
Principle #10 cont’d

 As amount of money in the market increases, the

personal spending may increase because of “buy
now, it will cost more later” attitudes.
 Increased D for goods and services
 Higher D causes firms to raise prices and hires
more workers to produce more goods
 More hiring mean lower unemployment
 So, there is a short term trade off b/n inflation and
unemployment Dec 7, 2024
 1.3. Demand, Supply and Equilibrium

Market
 It is the result of the interaction of supply and demand.

 Three components are needed:

1. Trading of a good or service;

2. Two independent players (buyers, sellers)

3. A 'price' of the good or service that conveys

information about its value
Dec 7, 2024
 Demand and Supply cont’d

Definitions of Supply and Demand

Buyers’ willingness to pay = DEMAND
Sellers’ willingness to produce = SUPPLY
 The model of demand and supply is one of the most

powerful tools in all of economic analysis.

 Demand is a representation of the behavior of buyers and

 Supply is a representation of the behavior of sellers.

Dec 7, 2024
 Demand and Supply cont’d

 Demand refers to the quantity of a good that is desired

by buyers.
 The quantity demanded refers to the specific amount
of that product that buyers are willing to buy at a given
price.
 The demand relationship is a relationship between
price and the quantity of product demanded at that price

Dec 7, 2024
Demand and Supply cont’d

 The supply-and-demand model relies on a high

degree of competition, meaning that there are enough
buyers and sellers in the market for bidding to take
place.
 Buyers bid against each other and thereby raise the
price, while sellers bid against each other and thereby
lower the price. Dec 7, 2024
 Demand and Supply cont’d

 The supply-and-demand model applies most accurately

when
1. There is perfect competition, and
2. No single buyer or seller can unilaterally affect
the price on the market
 This is an abstraction, because no market is actually
perfectly competitive

Dec 7, 2024
Demand and Supply cont’d

The Law of Demand

 The law of demand states that if all other factors
remain constant, if a good's price is higher, fewer
people will demand it.
 As the price of a good goes down, the quantity of that
good that the market will demand will increase.
 When prices move up or down, the quantity
demanded will move up or down the demand curve
and define the new quantity demanded
Dec 7, 2024
 Demand and Supply cont’d

Demand Curve – shows how much a consumer is willing and able to

purchase at different market prices.

Dec 7, 2024
 Demand and Supply cont’d

Elasticity of demand,
 If demand changes a lot when the price increases, we
say that demand is relatively elastic.
 If demand changes only slightly when price increases,
we say it is relatively inelastic.
 Using real data on price changes and changes in quantity
demanded, economists are able to quantify the rate of
change in demand that accompanies a change in price.
 This is called the Price Elasticity of Demand
Dec 7, 2024
Demand and Supply cont’d

 The least elastic demand curve is illustrated when

demand for emergency health services at times of
severe injury or illness might qualify as an example

Dec 7, 2024
Demand and Supply cont’d

 Determinants of Demand
1. Income
2. Price of Related Goods
a. Substitute Goods
b. Complementary Goods
3. Tastes and Preferences
4. Expectations Dec 7, 2024
Demand and Supply cont’d

1. Income
1.1. Normal Goods – the higher your income the more you
consume
Example: Car
↑Income
 consume more at each price and ↑D

1.2. Inferior Goods – as income rises you consume less

Examples: Potatoes
↑Income
 consume other products and ↓D

Dec 7, 2024
Demand and Supply cont’d

2. Price of Related Good

a. Substitute Goods – two goods in which a consumer
will consume one good or the other.
Examples: Pepsi or Coke, Rent Movie or Go to Theater
↑Price of Pepsi
drink less Pepsi
purchase more Coke
↑D

Dec 7, 2024
Demand and Supply cont’d

B. Complementary Goods – two goods consumed

together
Examples: DVD Player and Movie, and Milk and
cookies
↑Price of cookies
 consume less cookies
 consume less cookies and milk and ↓D

Dec 7, 2024
Demand and Supply cont’d

3. Tastes/Preference
New tastes for the product
 Consume more and ↑D

4. Expectations
↑Price tomorrow
• buy today instead of tomorrow
• ↑D

Dec 7, 2024
 Demand and Supply cont’d

The Law of Supply

 Supply- the amount of a good that a firm is willing and

able to offer for sale at all market prices, holding all else
constant
 Quantity Supplied - the amount of a good that a firm is

willing and able to offer for sale at the current market

price
 The law of supply- states that as the price rises for a

given product/service, suppliers are willing to supply

more.
Dec 7, 2024
 Demand and Supply cont’d

Supply Curve –shows how much a firm is willing and able

to offer for sale at different market prices.

Dec 7, 2024
Demand and Supply cont’d

Determinants of Supply
1. Number of suppliers
2. Cost of Production
a. Prices of required inputs
b. Technologies used in production
3. Price of Related Products

Dec 7, 2024
 Demand and Supply cont’d

Prices of required inputs

↑Price of labor and hire less people
Produce less amount of goods at current price and
↓S
 Technologies used in production

New technology
Produce output for customers
Higher profit on output
Produce more at current price and ↑S

Dec 7, 2024
Demand and Supply cont’d

Market Equilibrium
 Shortage (Excess Demand) – a shortage occurs when

the QD > QS at a particular price.

 Surplus (Excess Supply) – a surplus occurs when the
QD ≤ QS at a particular price.
 Market Equilibrium – occurs when there is no
incentive for prices to change (a steady state).
 This occurs when there is no surplus or shortage

(when QS = QD).

Dec 7, 2024
 Demand and Supply cont’d

At a price of P* and a quantity of Q*, the quantity

demanded and the supply demanded intersect at the
Equilibrium Price.

Dec 7, 2024
Demand and Supply cont’d

At equilibrium price, suppliers are selling all the goods

that they have produced and consumers are getting all the
goods that they are demanding.
This is the optimal economic condition, where both
consumers and producers of goods and services are
satisfied.
Those firms unable to reduce their costs sufficiently to
make a profit at the equilibrium market price will, in all
probability, go out of business because they are relatively
inefficient and wasteful of society’s resources
Dec 7, 2024
 Demand and Supply cont’d

The interaction of supply and demand in health

On the buyer’s side:
1. Buyers may not be able to buy, even if they are willing, because the
services are beyond their capacity to pay.
2. Buyers usually are not informed about the treatments that they should
undergo.
 One consequence is that the doctor may prescribe more care than needed, this
is called Supplier‐Induced Demand (SID).
 Furthermore, the patients usually don’t have the knowledge to choose
between one provider or the other, lacking information on the quality of
services.
3. Buyers are not always rational in their choices to Dec
seek treatment .
7, 2024
Demand and Supply cont’d

On the producer’s side:

1. Many sellers
 In rural areas of many countries there usually are only a

few providers and here the competitive model does not

apply.
2. Free entry
 This is often restricted by certification and regulation

requirements.
 It is also quite expensive to enter this market

Dec 7, 2024
 1.4. Market

 A market is a place where two parties can gather to

facilitate the exchange of goods and services.
 The parties involved are usually buyers and sellers.
 The market may be physical like a retail outlet, where
people meet face-to-face, or virtual like an online
market, where there is no direct physical contact
between buyers and sellers

Dec 7, 2024
 Types of Markets

Markets vary widely for a number of reasons, including

 The kinds of products sold,
 Location,
 Duration,
 Constituency of the customer base,
 Legality, and many other factors.

 Aside from the two most common markets—physical

and virtual—there are other kinds of markets.

Dec 7, 2024
Black Market

 It refers to an illegal market where transactions occur

without the knowledge of the government or other
regulatory agencies.
 Many black markets exist in countries with planned or
command economies—wherein the government controls
the production and distribution of goods and services,
when there is a shortage of certain goods and services in
the economy
 It can also exist in developed economies when prices
control the sale of certain products or services, especially
when demand is high.
Dec 7, 2024
 Auction Market

 An auction market brings many people together for

the sale and purchase of specific lots of goods.
 The buyers or bidders try to top each other for the
purchase price.
 The most common auction markets involve livestock
and homes, or websites like eBay where bidders may
bid anonymously to win auctions.

Dec 7, 2024
 Financial Market

 Financial market refers to any place where securities,

currencies, bonds, and other securities are traded
between two parties.
 These markets are the basis of capitalist societies, and
they provide capital formation and liquidity for
businesses.
 They can be physical or virtual.

Dec 7, 2024
 Competitive market

 A competitive market is one where there are

numerous producers that compete with one another in
hopes to provide goods and services
 Like producers, not one consumer can dictate the
market either.
 One producer and one consumer can't decide the price
of goods or decide the quantity that will be produced.

Dec 7, 2024
Market cont’d

The Four competitive market structure

1. Pure competition 3. Oligopoly

2. Monopolistic competition 4. Monopoly

Dec 7, 2024
 Market cont’d

Price setting
 Price is the amount of money charged for a product or
service.
 The sum of all the values that consumers give up in order
to gain the benefits of having or using a product or
service.
 It is the only element in the marketing mix that produces
revenue; all other elements represent costs.

Dec 7, 2024
1.4.1.Factors to be Considered When Setting Prices

1. Customer value – Value-oriented pricing strategies:

2. Product Costs – Cost-based pricing strategies: cost-
plus pricing, break-even pricing and target profit pricing
3. Internal – Company marketing objectives; marketing
mix strategy and organizational factors
4. External – The nature of market and demand,
competition, the economy, reseller needs, and
government actions

Dec 7, 2024
 Price setting cont’d

Customer Perception of Value

 Effective customer-oriented pricing involves understanding
how much value consumers place on the benefits they receive
from the product and setting a price that captures that value.
 Value-based pricing uses the buyers’ perception of value, not
the seller’s cost, as the key to pricing.
Value-based pricing is customer-driven.
Cost-based pricing is product-driven

Dec 7, 2024
 Price setting cont’d

 Pricing power is the ability to escape price

competition and to justify higher prices and margins
without losing market share
 Value-added pricing attaches value-added features
and services to differentiate offers, support higher
prices, and build pricing power

Dec 7, 2024
 Price setting cont’d

Company and Product Costs

 Cost-based pricing involves setting prices based on

the costs for producing, distributing, and selling the

product plus a fair rate of return for its effort and risk.
Types of costs
 Fixed costs

 Variable costs

 Total costs

Dec 7, 2024
 Price setting cont’d

 Fixed costs are the costs that do not vary with

production or sales level – Rent; Utilities,
 Variable costs are the costs that vary with the level
of production – Packaging; Raw materials
 Total costs are the sum of the fixed and variable
costs for any given level of production.
 Average cost is the cost associated with a given
level of output.
Dec 7, 2024
 Price setting cont’d
 Cost-plus pricing adds a standard markup to the cost of
the product.
 Break-even pricing is the price at which total costs are
equal to total revenue and there is no profit.
 Target profit pricing (a variation of break-even) is the
price at which the firm will break even or make the
profit it is seeking

Dec 7, 2024
 Price setting cont’d
 Cost-plus pricing, also called markup pricing, is the practice by a

company of determining the cost of the product to the company and

then adding a percentage on top of that price to determine the

selling price to the customer.

 Eg. Suppose that a company sells a product for $1, and that $1

includes all the costs that go into making and marketing the product.

The company may then add a percentage on top of that $1 as the

"plus" part of cost-plus pricing. That portion of the price is the

Dec 7, 2024
company's profit.
Price setting cont’d
 Break-even pricing is an
accounting pricing methodology in which
the price point at which a product will earn zero profit
is calculated.
 In other words, it is the point at which cost is equal to

revenue.
Eg, the break-even price for selling a product would be
the sum of the unit's fixed cost & variable cost incurred to
make the product.
Thus if it costs $20 total to produce a good, if it sells for
$20 exactly, it is the break-even price Dec 7, 2024
 Price setting cont’d

 Target Profit Pricing, is a strategy that tells the

management the total units to be sold to achieve the
targeted profit for a particular period.
 Under this strategy, after considering total costs
and profit targets, the management decides on the total
production and sales for a particular period.

Dec 7, 2024
Price setting cont’d

Other Internal and External Considerations

affecting Price Decisions
 Customer perceptions of value set the upper limit for

prices, and costs set the lower limit.

 Companies must consider internal and external

factors when setting prices

Dec 7, 2024
1.4.2. Free and regulated markets

Market economies (free markets) and command

economies (regulated markets) occupy two polar
extremes in the organization of economic activity.
 The primary differences lie on:

Division of labor, or
Factors of production and
The mechanisms that determine prices.

Dec 7, 2024
Free and regulated markets cont’d
 The activity in a market economy is
 Unplanned;
 It is not organized by any central authority but
 Is determined by the supply and demand of
goods and services

Dec 7, 2024
Free and regulated markets cont’d

 Alternatively, a command economy is organized by a

centralized government that owns most, if not all,
businesses and whose officials direct all the factors of
production.
 In reality, all economies blend some combination of
market and command economies.

Dec 7, 2024
 1. Market Economy (free market)

The fundamental aspects are

 Private ownership of the means of production and
 Voluntary exchanges/contracts.
The rationales in Private Enterprise System,
Resources are privately owned
Consumers decide where to live, to shop, and what to
buy
Government control of the market is minimal
Government support the market Dec place
7, 2024
and remove
 Market Economy cont’d
 Should answer the three questions

1st. What to produce?

 Type and quantities of products

2nd. How to produce?

 Methods used to produce these products

3rd. For whom to produce?

 Distribution of these products
Dec 7, 2024
Market Economy cont’d

The most common title associated with a market

economy is Capitalism.

Individuals and businesses own the resources and

are free to exchange and contract with each other
without a decree from government authority.

Dec 7, 2024
Market Economy cont’d

 Advantages:
 Freedom to choose from many different products
 Freedom to start a business or choose a career
 Disadvantages:
 Those who do not have the wanted job skills do not get
an income
 Sometimes only one or two businesses control the
market, thus leading to higher prices and lower quality
products Dec 7, 2024
 2. Command Economy (regulated markets)

In a command economy,
 Governments own the factors of production such
as land, capital, and resources, and
 Government officials determine when, where, and
how much is produced.
 This is also sometimes referred to as a planned
economy.
Dec 7, 2024
 Command Economy cont’d

Communism
Strong command economy that the government
makes all economic decisions
The state controls all resources

Socialism
 Moderate command economy
 Some form of private enterprise
Dec 7, 2024
 State owns major resources
 Command Economy cont’d

Unlike free market economy, in command economy:

 Prices cannot arise naturally, since prices in the

economy must be set by government officials.

 Macroeconomic and political considerations determine

resource allocation
 Are concerned with providing basic necessities and

opportunities to all members.

Dec 7, 2024
Command Economy cont’d
Advantages:
It guarantees everyone an equal standard of living
The State provides you with a job, a place to live,
and health care.
Products are distributed evenly
The State takes care of utilities, transportation, and
defense
Usually less crime and poverty –needs equally met

Dec 7, 2024
Command Economy cont’d

Disadvantage:
 Little choice of what to buy
 Non essentials are often unavailable
 Prices, wages are fixed
 No incentives for entrepreneurship

Dec 7, 2024
Free and regulated markets cont’d

Dec 7, 2024
3. Mixed Economy

Most Nations have a combination of market and

command economy
 State takes care of people’s needs
 Marketplace takes care of people’s wants

 In every country one type of economy is

dominant, but finding a mixed economy is the
best way to manage their limited resources

Dec 7, 2024
 1.4.3. Market failure

 The market mechanism may fail to provide the optimal

mix of output:
 The optimal mix of output is the most desirable
combination of output attainable with existing
resources, technology, and social values.
 Market failure is an imperfection in the market
mechanism that prevents optimal outcomes

Dec 7, 2024
 Conditions to Perfect Competition

1. The industry has many firms and many customers;

2. All firms produce identical products;
3. Sellers and buyers have all relevant information to
make rational decisions about the product being
bought and sold; and
4. Firms can enter and leave the market without any
restrictions

Dec 7, 2024
Market failure cont’d

There are four specific sources of microeconomic

market failure:
Public goods
Externalities

Market power
Inequity

Dec 7, 2024
 Market failure: by Public goods

 A public good is a good or service whose consumption

by one person does not exclude consumption by others.
A private good is a good or service whose
consumption by one person excludes
consumption by others.

Dec 7, 2024
 Cont’d
 Public goods are goods where the total cost of
production does not increase with the number of
consumers.
 Eg. a lighthouse has a fixed cost of production that is
the same, whether one ship or one hundred ships use its
light.
 Themarket will fail if some consumers decide not to
pay but use the good/service anyway

Dec 7, 2024
Market failure: by Externalities

Externalities
 An externality is an effect on a third party that is

caused by the consumption or production of a good or

service.
 The market will under produce goods that yield

external benefits.
 The market will overproduce goods that generate

external costs.

Dec 7, 2024
 Cont’d

A positive externality is a positive spillover that results

from the consumption or production of a good or
service.
 For example, although public education may only

directly affect students and schools, an educated

population may provide positive effects on society
as a whole

Dec 7, 2024
Cont’d

A negative externality is a negative spillover effect on

third parties.
 For example, secondhand smoke may negatively

impact the health of people, even if they do not

directly engage in smoking.

Dec 7, 2024
Market failure: by Market power

Market power is the ability to alter the market price of

a good or service.
 Market power results from restricted supply due to:
Copyrights
Patents
Control of resources
Restrictive production agreements
Efficiencies of large-scale production

Dec 7, 2024
Market failure: by Inequity

Inequity entails lack of equitable distribution in the

market.
 The government alters the distribution of income with

taxes and transfers.

Income transfers–payments to individuals for
which no current goods or services are exchanged
Intended to protect workers and their dependents
against lost earnings due to retirement, death or
disability…

Dec 7, 2024
Market failure in the health sector

 When any of the conditions for competitive

markets are
 Weakly represented or not in place at all
 Market failure and limitations of markets
 Problematic in promoting equity

Dec 7, 2024
 Market failure in the health sector cont’d

1. Externalities (positive or negative)

 Situations where decisions of consumers or producers
have an impact on a third party
 This impact can be positive or negative
 Some health goods and services benefit people who
are neither buyers nor sellers,

Dec 7, 2024
 Market failure in the health sector cont’d

 Common example in the health field is immunization

for contagious diseases
 People who are not presently being immunized will

benefit by those who do pay for it.

 As the market will tend to undersupply goods or

services with positive externalities, there is a role for

government to supply these goods

Dec 7, 2024
Market failure in the health sector cont’d

 Examples of negative externalities in the health

sphere are the use of tobacco or alcohol consumption
 Smoking-health effect on the person consuming
the cigarette and the people that surround him,
 there is a role for government to educate the public
about these negative health effects

Dec 7, 2024
Market failure in the health sector cont’d

'Drunk driving' affects the health sector as a large number

of road accidents with the associated increased demand for
hospital services.
 The major problem with externalities is that private

markets tend to ignore them

 Positive externalities - the market will not produce

enough of the good

 Negative externalities- the goods will be overproduced

Dec 7, 2024
 Market failure in the health sector cont’d

2. Public goods
 Some goods and services beneficial to health such as
clean air, or clean drinking water from rivers or lakes
 Are not willingly paid for by individual consumers in
competitive markets,
 They require a collective mobilization of public
revenues and expenditures for public health goods and
services Dec 7, 2024
Market failure in the health sector cont’d

3. Informational asymmetry; agency issues; supplier-

induced demand (SID)
 Clients often do not fully understand health
products and services,
 Supplier/Provider becomes the 'agent' for the
patient.

Dec 7, 2024
Market failure in the health sector cont’d

 His interests may conflict with those of the patient

and he is able to exercise 'supplier-induced demand‘
 Increasingly problematic with the supply of more
complicated technologies
 the need for an MRI and the supply of more
complicated services like surgeries

Dec 7, 2024
 Market failure in the health sector cont’d
4. Monopolies and incomplete/unsustainable markets
 Sometimes there are only a few suppliers of some

health interventions;
 they can dictate prices
 this creates a problem for the affordability and
accessibility of health care
In addition, some parts of a country may be
 too inaccessible, too remote, too sparsely populated,
 too poor to sustain a market for health goods and

services
Dec 7, 2024
 1.5. Society and Scarce Resource
Scarcity ; what ….?
A. A shortage of resources used to satisfy the wants and
needs
B. Basic economic problem for any society is how to
manage its resources.
C. Need to develop new resources and technologies.

Dec 7, 2024
Scarcity…

Dec 7, 2024
Society and Scarce Resource cont’d

Causes of scarcity
Personal perspective
Poor distribution of resources
Rapid increase in demand

There are 4 types of economic resources that go into

making our products.

Dec 7, 2024
 Economic Resources

1. Natural resources (land)

 Materials used to form products.
 The amount of resources available to a country has a
direct effect on its economy
A countries economy is based on its natural resources
Renewable resources: Can be reproduced.
Ex: Cattle, wheat
Nonrenewable resources: resources that are limited.
Ex: Coal, iron & oil Dec 7, 2024
 Economic Resources cont’d

2. Human resources (labor)

 The knowledge, efforts, and skills people bring to
their work
 Skilled or unskilled
 Physical (blue collar) Intellectual (white collar)
 Labor unions - workers belong to organization,

Dec 7, 2024
 Economic Resources cont’d

3. Capital resources
 Things used to produce goods/services, like buildings,

materials, and equipment

4. Entrepreneurial resources
 Meets the changing needs/wants of people

 They improve on ways to use resources, or create and

produce new ones

 The problem of scarcity forces societies to make choices

Dec 7, 2024
If any…?
Dec 7, 2024